A systematic withdrawal plan is a financial plan that allows a shareholder to withdraw money from an existing mutual fund portfolio at predetermined intervals. The money can be reinvested in another portfolio or used to pay for something else. Often, this type of plan is used to fund expenses during retirement. However, it may be used for other purposes as well.
With a systematic withdrawal plan, a fixed or variable amount is withdrawn at regular intervals. Withdrawals can be made on a monthly, quarterly, semi-annual, or annual schedule. The holder of the plan may choose the intervals based on his or her commitments and needs.
These plans offer many benefits. For example, they allow account holders to access their money exactly when they need it. This makes it easier for account holders to carry out their financial plans and meet their goals.
A systematic withdrawal plan allows the account holder a certain level of independence from market fluctuations. By making periodic withdrawals, account holders are able to enjoy average return values that often exceed average sale prices. In this way, they are able to secure higher unit prices than those attainable by withdrawing everything at once.
There are also tax advantages to this type of plan. Withdrawals are made from capital, and as such, long-term gains are paid at a lower tax rate. Many individuals use these plans as part of their tax-planning strategies in an effort to make the most of this lower rate of taxation.
With a systematic withdrawal plan, an investor’s money will continue to grow as long as the investment is performing at a rate that is higher than the rate of withdrawal. For this reason, it is wise to diversify your investments. However, diversification makes sense for quite a few types of investments besides mutual funds.