SWP: Withdraw straight from equity? Not so fast

A user recently asked us: “For retirees, you suggest transferring annual requirements from hybrid//equity to liquid fund and do monthly SWP from there. Isn't it better to do so from the source fund itself?”

At first glance, it does seem like an unnecessary extra step. Why add another layer when you could just pull money straight from where it’s invested? But here’s the thing: Retirement income planning isn’t just about simplicity; it’s about stability and safety.

Let’s explore why tapping equity funds directly for regular income can backfire, and what you should do instead.

Why is SWP from equity not ideal for retirees?

For a retiree who’s depending entirely on their savings, relying on equity can be risky because it can blow hot and cold over shorter periods. There is a possibility that the equity investments fall in value at a time when you need the money.

So what’s the alternative? Use a more stable source—like a liquid fund—for your monthly withdrawals. It keeps your income predictable and your anxiety in check.

However, don’t park your entire retirement corpus in liquid funds. Although liquid funds may be safe, they’re not great at growing your money. So, you risk running out of funds in later years.

Which is why here’s the smart middle path we suggest:

• Keep the next 12 months’ expenses in a liquid fund. This covers your short-term needs smoothly.
• Invest the rest in equity and debt funds in a 35:65 ratio.
• Equity helps your money grow and beat inflation.
• Debt brings stability and cushions against market swings.

At the end of each year, simply refill your liquid fund with the next year’s expenses by withdrawing from the equity-debt mix, while ensuring the 35:65 equity-debt balance is maintained. That way, you're booking profits when markets are up and preserving balance when they're not.

It’s simple and sustainable.

Real-world example

Imagine someone retiring at the end of 2004 with a corpus of Rs 1 crore, looking to generate a regular income from it. Starting in 2005, they withdrew 6 per cent of the corpus at the beginning of each year. We then track how their retirement journey unfolds over the next two decades—right up to June 2025—under three different approache:

• Case 1: Withdrawing directly from an equity fund (represented by an average flexi-cap fund)
• Case 2: Shifting the entire corpus to a debt fund (average short-duration fund) and withdrawing from there
• Case 3: Using the framework suggested by us: Transferring one year’s expenses annually to a liquid fund, with the rest invested in a 35:65 mix of equity and debt.

The below graph captures the yearly withdrawals for each case since 2005.

All three retirees started in 2005 with a Rs 6 lakh withdrawal, but by 2025, their journeys had diverged sharply:

• Case 1 (Equity-only): Withdrawal soared to Rs 31.65 lakh, thanks to strong market gains.
• Case 2 (Debt-only): Crawled to just Rs 6.85 lakh, not good enough for beating inflation over such a long period.
• Case 3 (Balanced): Reached a solid Rs 14.29 lakh, balancing growth and stability.

While Case 1 ended with the largest corpus and the juiciest withdrawals, the ride was anything but smooth. It was a classic case of boom and bust. When markets were flying high, withdrawals looked fantastic—but a market crash could quickly turn the taps off.

Take 2008 for instance: Riding on the 2007 bull run, annual withdrawal shot up to over Rs 15 lakh. But after the 2008 market crash, 2009’s withdrawal crashed to just Rs 6.8 lakh—a brutal 55 per cent cut in income.

Similarly,  after the 2011 correction, withdrawals in 2012 dipped again—this time by 30 per cent, from Rs 13.3 lakh in 2011 to Rs 9.4 lakh in 2012.

For a retiree who depends on this income to manage regular household expenses, such unpredictability can be deeply unsettling. It’s not just about numbers; it’s about peace of mind.

The graph below clearly highlights the sharp volatility in withdrawals under the equity-only approach, especially when compared to the steadier paths of the debt-only (Case 2) and balanced (Case 3) strategies.

While Case 2 (debt-only) may offer the comfort of stability compared to Case 1, it falls flat when you bring inflation into the mix. A retiree withdrawing Rs 6 lakh in 2005 is still scraping by on just Rs 6.85 lakh in 2025 using a debt-only portfolio. That’s not income growth—it’s stagnation in slow motion.

Because if you factor in inflation, the Rs 6 lakh withdrawal should actually have been Rs 16 lakh today. So, unless this retiree drastically downsized their life, the debt-only plan simply didn’t keep up.

That leaves Case 3 (Balanced) approach. Only this scenario strikes the right balance, offering modestly growing withdrawals with far less volatility, making it a far more sustainable and retiree-friendly option.

Also read: Should you set up an SWP in a small-cap fund?

This article was originally published on June 18, 2025.