A Systematic Withdrawal Plan, commonly called an SWP, is a mechanism through which an investor withdraws a specified amount from an investment at regular intervals.
The basic mechanics
Suppose an investor has a corpus and chooses a monthly withdrawal. Units are redeemed to meet the withdrawal. The remaining corpus continues to be exposed to the performance of the underlying investment.
Why the sequence matters
Two portfolios can experience the same average return over a long period but produce different withdrawal outcomes if their returns arrive in a different order. Large declines early in the withdrawal phase can have a disproportionate effect when money is being taken out at the same time.
What should be considered
- Starting corpus
- Withdrawal amount
- Withdrawal frequency
- Investment mix and risk
- Expected duration
- Inflation
- Tax treatment under prevailing law
- Contingency reserves outside the portfolio
An SWP should therefore be evaluated as part of a broader cash-flow plan rather than by looking at a single assumed return.