A withdrawal plan is a financial blueprint designed to allow investors to periodically withdraw money from mutual funds or other investment accounts. Frequently used to fund retirement expenses, these plans can also be adapted for various financial objectives.
Key Takeaways
- Periodic Withdrawals: Withdrawal plans allow investors to extract funds from their investment accounts at regular intervals.
- Income Stream: They create a consistent income stream, particularly useful during retirement years.
- Strategy: Investors can use this strategy to systematically liquidate their investment portfolios over time.
How a Withdrawal Plan Works
Often termed as a “systematic withdrawal plan,” this financial arrangement enables an investor to receive a specific sum from a mutual fund or another investment account on a predetermined schedule. The strategy may involve an investor liquidating parts of their portfolio to generate cash periodically, such as selling equity shares annually to support their retirement.
Withdrawal plans can also function within the structure of a trust or family corporation, ensuring regular payments to beneficiaries, be it monthly or quarterly.
Advantages of a Systematic Withdrawal Plan
Opting for a systematic withdrawal plan can be highly advantageous:
- Consistent Income: It ensures a steady revenue stream during retirement, while still allowing the investor’s remaining funds to grow within the mutual fund.
- Higher Unit Prices: With periodic withdrawals, investors often secure average return values and higher unit prices compared to withdrawing a lump sum.
- Tax Benefits: Gains from withdrawals are generally taxed at lower long-term capital gains rates. This strategy aids in efficient tax planning.
- Growth Potential: If the investment grows at a rate higher than the withdrawal rate, the principal can continue to appreciate, stretching out the investment’s lifespan.
- Flexibility: Options to manage a portfolio, periodically sell assets, invest in income-generating securities, or purchase an annuity provide flexibility in maintaining a prolonged financial safety net.
Downside of a Systematic Withdrawal Plan
On the downside, if the market experiences a downturn, more securities will be required to meet withdrawal needs, negatively impacting overall returns. This scenario can work contrary to a dollar-cost averaging strategy, lowering your overall internal rate of return when compared with other withdrawal methods.
Related Terms: mutual fund, liquidity, long-term gains, systematic withdrawal, market correction, dollar-cost averaging.
