- PERSONAL FINANCE
- RETIREMENT PLANNING
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What Is a Systematic Withdrawal Plan (SWP)?
A systematic withdrawal plan (SWP) is a scheduled investment withdrawal plan that is typically used in retirement. You can structure an SWP in various ways. Mutual funds typically allow you to determine an SWP that includes interval payouts monthly, quarterly, semi-annually, or annually.
KEY TAKEAWAYS
- A systematic withdrawal plan (SWP) allows for pre-planned cash flows generated by investments as income.
- Retirees are most often reliant on SWPs for retirement income generated from investments accumulated in retirement accounts like IRAs or 401(k) plans or through annuitizing assets.
- Understanding how much income you'll likely need in retirement is an important step in establishing an SWP. Online retirement calculators that take into account things like inflation, taxes, and Social Security can help.
Understanding Systematic Withdrawal Plans
A systematic withdrawal plan is most commonly used for retirement. However, you can structure and use SWPs for various payout needs. Systematic withdrawal plans can be set up for withdrawals from nearly any type of investment vehicle in the market.
Common investment vehicles used for SWPs include mutual funds, annuities, brokerage accounts, 401k plans and individual retirement accounts (IRAs). An annuity is a common type of systematic withdrawal plan that provides a set series of cash flows based on some initial contribution(s).
Planning for an SWP
To proactively plan for systematic withdrawals, you can use resources such as SWP calculators or standard retirement calculators. Investment planning calculators will help you determine the target amount you will need to cover your withdrawal needs through a pre-determined utilization phase.
Vanguard's Retirement Income Calculator is one example. Variables involved include age, annual salary, retirement savings income allocation, and other retirement fund estimates. Calculators can provide you with the monthly amount you’ll need to withdraw for a systematic withdrawal plan and also help you to determine how much you need to save to reach your goal.
Setting Up an SWP
Setting up an SWP can take time. Understanding your options and the processes involved can help you to more efficiently receive your income cash flows. Most investments will offer a systematic withdrawal plan. You can make systematic withdrawals from mutual funds, annuities, brokerage accounts, 401k plans, IRAs, and more. Careful due diligence for retirement accounts specifically will be important since they may require mandatory withdrawals (distributions) at a specified age.
Retirement investment account SWPs require additional due diligence since they are regulated by Internal Revenue Service (IRS) guidelines. You must begin taking withdrawals (distributions) from a traditional IRA, SEP IRA, SIMPLE IRA or retirement plan account at the age of 73.
Standard investment accounts, mutual funds, and other account providers will require an SWP form, which may also be known as a distribution form. You can determine various distribution schedules including monthly, quarterly, and annually.
Accounts typically have a minimum balance requirement for beginning systematic withdrawals. You may have the option to specify liquidation percentages by funds for accounts with multiple holdings. This can occur with mutual fund company holdings, brokerage accounts or portfolios managed by a financial advisor.
Other Considerations
In preparing for and initiating an SWP, you may also want to consider taxes and potentially a systematic transfer plan.
A tax advisor can help you determine the tax rate you will pay on withdrawals from both standard and retirement accounts. Since withdrawals require selling securities to make distributions from standard accounts, the withdrawals will typically be taxed as income. Retirement account withdrawals have their own tax structures.
Is a Systematic Withdrawal Plan Risky?
A systematic withdrawal plan is designed to be the opposite of risky. By using a pre-planned and specified system for taking distributions from your account, you can manage the risk beforehand, and course-correct accordingly.
What Is the 4% SWP Rule?
The 4% rule states that you can withdraw up to 4% of your investment assets from your account and enjoy a retirement that lasts thirty years. It's a traditional metric that doesn't work for everyone, but it still used as a general rule of thumb.
What Is a Safe Withdrawal Rate for a 70 Year Old?
You might want to start with the 4% rule. Say you have $1 million in a retirement savings account at age 70. The 4% rule recommends you withdraw 4% of that nest egg—$40,000—per year in retirement. This withdrawal rate will last you 30 years. And to tell whether that $40,000 will be enough, consider the 80% rule: advisors recommend estimating that you'll need about 80% of your current living expenses to live on during retirement. With this example, you can ask yourself: Do you live on $48,000 (which is $40,000 x 1.2) now? If so, then $40,000 per year in retirement—and a $1 million nest egg—is enough.
The Bottom Line
A systematic withdrawal plan (SWP) enables you to create a set income stream by dividing up your investment or retirement account into smaller sections. You receive this income on a regular basis at a time interval you choose, such as monthly or annually.
To understand how much income you'll need, you can use an online calculator, inputting your own data. Don't forget to account for variables such as inflation.
In some cases, you may have the option to make scheduled systematic transfers. This could be a good option for structuring fund withdrawals into a cash, savings or money market account.