Systematic Withdrawal Plan - SWP

A systematic withdrawal plan (SWP) is a scheduled investment withdrawal plan typically used in retirement. Investors can structure SWPs in various ways. Mutual funds typically allow an investor to determine a systematic withdrawal plan that includes interval payouts monthly, quarterly, semi-annually or annually.

A systematic withdrawal plan is most commonly used for retirement. However, investors can structure and use SWPs for various payout needs. Systematic withdrawal plans can be setup 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).

To proactively plan for systematic withdrawals an investor can use resources such as SWP calculators or standard retirement calculators. Investment planning calculators will help an investor determine the target amount they will need to cover their withdrawal needs through a pre-determined utilization phase. The Vanguard Retirement Income Calculator is one example. Variables involved include age, annual salary, retirement savings income allocation, current allocation, retirement income needs, expected annual return from investment, social security estimate 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 a SWP can take time. Understanding your options and the processes involved can help an investor to more efficiently receive their income cash flows. Most all types of investments will offer a systematic withdrawal plan. Investors 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 at a specified age.

Standard investment accounts, mutual funds and other account providers will require a SWP form which may also be known as a distribution form. Investors can determine various distribution schedules including monthly, quarterly, semi-annually or annually. Accounts typically have a minimum balance requirement for beginning systematic withdrawals. For convenience, investors 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.

Retirement investment account SWPs require additional due diligence since they are regulated by Internal Revenue Service (IRS) guidelines. The IRS requires that investors begin taking withdrawals from a traditional IRA, SEP IRA, SIMPLE IRA or retirement plan account at the age of 70½.

In preparing for and initiating a SWP, investors 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 will have their own tax structures.

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.

For more on SWPs, see Will A Systematic Withdrawal Plan Work For You?