Retirement planning may seem difficult during high inflation, financial uncertainty, and never-ending needs. Still, procrastination or, even worse, ignoring it can be disastrous for your finances in old age. Luckily, though, there are financial tools which can make this task easier. Here are two financial instruments – the National Pension System (NPS) and the Systematic Withdrawal Plan (SWP) in mutual funds commonly used for retirement planning. However, are they the right tools or enough to help you achieve your goals? Let’s find out. While NPS is a retirement savings scheme requiring regular contributions, SWP is a withdrawal facility that helps create a steady retirement income stream from an existing corpus. However, both instruments offer different reward mechanisms. Which One Suits Your Retirement Needs? Kiran Telang, financial planner and author of “Mindful Retirement” and “Moneywise-Perspectives for Women”, says, “During the accumulation phase, NPS scores better on the cost front. However, during the withdrawal phase, you can withdraw 60% of the corpus tax-free, while the balance 40% has to be mandatorily used to buy an annuity from an insurance company.” On the other hand, she says, “In SWP through MF, you can utilise the full corpus as you wish. Hence, the control of end-use is one plus point in favour of MF. “As things stand today, taxation is more beneficial if MF SWP from debt funds is used. However, taxation keeps changing, and we cannot guess what it will be like in the future. Annuity rates are not great, and the income is fully taxable. Using NPS or MF for retirement will depend on several factors, including client discipline and behaviour.” Balancing Stability and Growth with a Hybrid Strategy Abhishek Kumar, a Securities and Exchange Board of India (Sebi) registered investment advisor and founder of SahajMoney, a financial and investment consultancy, explains, “Both strategies have pros and cons. Instead of just one, we suggest a hybrid strategy. This means buying an annuity product for 30 years to get a pension and park the balance in different investments as part of a bucket strategy to hedge against inflation. “ For example, he says, suppose one has a ₹2 crore corpus before retirement and wants to generate ₹50,000 as monthly income, adjusted at 6% inflation for 30 years. In that case, one can park ₹80 lakh in it to generate a monthly pension of ₹50,000 from an annuity, based on a 7% return. The balance ₹1.2 crore could be parked in an equal mix of equity and debt funds, adjusting the amount for inflation for 30 years. Next, they can set up a monthly SWP of ₹50,000 from their debt fund portfolio, and based on the return, they can rebalance their equity portfolio to adjust for inflation and shortfall in their monthly pension.
“As SWP is superior for long-term sustainability, while NPS provides stability, combine both for balanced post-retirement planning,” Kumar adds. Here’s an infographic to help explain the strategy: NPS is good, but SWP could be even better Explains Mahek Tomer, founder CEO of India’s Future Investors: “NPS provides a mix of equity and debt exposure, with tax benefits under Section 80CCD (1B). Mutual Fund SWP works like a self-created pension, allowing investors to withdraw a fixed sum periodically. The returns depend on market performance, but it offers greater liquidity and flexibility than NPS. The following table provided by IFI shows that SWP could give better returns than NPS: Additionally, the age and income of the subscriber is crucial. Tomer says NPS is best for young investors who want to benefit from compounding in the long term. It also suits salaried individuals seeking disciplined savings with tax benefits. SWP, he says, is suitable for retirees or those needing periodic income after investment maturity, especially those with a large corpus, ensuring liquidity while preserving principal.