A Simple Guide to Systematic Withdrawal Plans

Traditionally, there are four pillars to retirement planning: Interest, Dividends, Capital Gains, and Principal. In this series of retirement income articles, we want to explore the best way to balance these pillars.

In this article, we’re going to take a closer look at how systematic withdrawal plans (SWPs) work and some pros and cons to consider when thinking about SWPs as a retirement income strategy.

Defining Systematic Withdrawal

A systematic withdrawal plan (SWP) is a scheduled investment withdrawal plan popular with traditional mutual fund families like American Funds and Franklin Templeton. They can be used in many different situations, but are typically used in retirement. These plans allow an investor to determine a systematic withdrawal schedule that includes payouts in intervals that can be monthly, quarterly, semi-annually or annually.

These days, figuring out a withdrawal schedule doesn’t need to be left to guesswork or having your investment advisor holding your hand. Don’t get us wrong, the advisor can help you determine your target dollar amount, but for the calculation on how it will work with a given set of fund parameters, just go online and use an SWP calculator. It will help you determine how your dollar amount will work with the overall funds available and the allocation interval that works best for you.

Will you be living on the interest or on the principal? That depends on the amount you have to work with and other sources of retirement income available. Because you may outlive the timeframe you have set up using the calculator, there is potential to spend through principal and not just live off the interest.

How to Set Up an SWP

This is a very common approach, so common investments like mutual funds offer systematic withdrawal plans. In addition to mutual funds, common investment tools include annuities, 401(k)s, IRAs, and brokerage accounts, among others. One thing to watch out for – many investment instruments require mandatory withdrawals at a given age. For IRAs, SEP IRAs, Simple IRAs or retirement plan accounts, the IRS requires that investors begin taking withdrawals at 72. This was updated from 70.5 with the passing of the SECURE ACT.

Beyond that, it’s paperwork. Your fund manager will have a distribution form for you to record your frequency of distribution anywhere from monthly to annually.

Other SWP Considerations

In some cases, investors may also have the option to make scheduled systematic transfers. This can potentially be a good option for structuring fund withdrawals into a cash, savings or money market account.

SWPs can help you manage market fluctuations by making the current state of the market more or less irrelevant. Your withdrawal amount will be steady, so during up markets, you won’t be tempted to grab the windfall and do something irrational with it. Similarly, during market corrections, you won’t be tempted to withdraw large amounts out of fear or panic. The mutual fund, or whatever the instrument you are using, will be operating as it has while you were accumulating the wealth you put into it.

We think SWPs on a mutual fund, IRA, or 401(k) can be one good strategy among many. But since the withdrawal of interest only is a challenge for many, especially as time marches on, you will want to pair this strategy with your other categories of retirement income and investments.