How Does a Systematic Withdrawal Plan (SWP) Work?

If you’re ready to start taking income from your retirement accounts or investment portfolio, you might consider setting up a Systematic Withdrawal Plan (SWP). SWPs are a way to set up regular payouts from your investments, either monthly, quarterly, semi-annually, or annually.  They are commonly used during retirement but can also be utilized at other points throughout your life. Most brokerages allow you to set up an SWP yourself, though you may also wish to find a financial advisor who can walk you through the process.

Systematic Withdrawal Plan Basics

An SWP’s payout is usually generated by selling stocks or other securities within your portfolio. These securities can be sold in proportion to the entirety of your investment portfolio, which keeps your asset allocation on target.

You can set up an SWP with any kind of brokerage account or investment vehicle, including annuities and retirement funds (like an IRA). The investments you liquidate as part of your SWP may include stocks, bonds or mutual funds. 

If you work with a financial advisor, they likely offer an SWP and can help you set one up. Your brokerage firm may also offer an automatic SWP. In either case, actually setting it up may be as simple as filling out a form and setting the payment schedule and amount. You’ll need to determine your payout amount, the frequency at which you’d like to receive payments, and from what investment vehicles you’d like to draw from.

How large should your payout amounts be? While there are standard recommendations about withdrawal rates –  one rule of thumb is to withdraw 4% of your savings every year – it really depends on your financial needs into retirement. How much will you need to retire and maintain the same standard of living? Have you appropriately estimated your future healthcare costs? What about end-of-life care? These are all expenses that should be factored into your retirement planning, and accordingly, any SWP payout amounts.

Use a retirement calculator to help determine how much you’ll need in each payout and the frequency of those payouts. Don’t forget to factor in any pension plan payouts, Social Security benefits, and other sources of retirement income. 

Systematic Withdrawal Plan Benefits

An SWP can also help keep you organized and on a budget while in retirement. Receiving a regular “paycheck” can often be easier to manage than one lump sum since it can mimic the cadence of a regular paycheck or pension payment.

Ideally, your SWP would provide you with an income stream comprised solely of your portfolio’s rate of return, preserving your principle for big expenses (like vacations), emergencies and an estate to pass along to your heirs. This can be a big draw of this method. Another plus? Since your SWP payouts are comprised of the liquidation of securities spread out across your investment portfolio, an SWP can help keep your portfolio’s asset allocation on target.

Potential Drawbacks of a Systematic Withdrawal Plan

While setting up an SWP may sound like a no-brainer, there are a few things to consider. First, there’s the volatility of the stock market. This matters if your payout structure is based on your portfolio’s average rate of return, because the average rate of return is just that – an average. In a given year, it might be considerably lower, and bear markets do happen. Maintaining the same withdrawal rate during lean years might mean spending down your account balance faster than it can replenish itself, leaving you with less principle to earn interest when the market rebounds. At the very least, it’s wise to consider if having your payouts on autopilot is the best financial move. If you’re risk-averse, it may be a better option to structure sliding payouts based on the market and your portfolio’s rate of return.

When setting up an SWP with your brokerage account, be sure to read the fine print regarding any potential transaction fees. You should also talk to a professional regarding any potential tax implications of this payout structure. For example, you will likely have to pay taxes on your SWP payouts since you are selling stocks to create those payments. This means they count as income for tax purposes. This is also the case if your SWP is pulling from a tax-deferred retirement account like a traditional 401(k) or IRA. These accounts are also subject to the IRS’ required minimum distributions and timeline, so make sure any SWP accounts for these requirements. 

The Bottom Line

A systematic withdrawal plan can be a good option for those who wish to receive a regular payout to help manage their retirement savings. However, it’s best to take a measured approach, as SWPs’ set payouts don’t adjust based on the status of the market or an investment portfolio’s rate of return.

Since this strategy is based on both selling stocks and a guaranteed rate of return, retirees who experience less-than-stellar returns on their portfolio early on may risk running out of funds prematurely. 

Retirement Tips

• A financial advisor can help you build a retirement income plan and set up an SWP to keep you on track with it. Find an advisor to help you with SmartAsset’s free financial advisor matching service. Just answer a few questions about your finances and we’ll match you with up to three advisors in your area. You’ll then get a chance to talk with each advisor and make a choice about how to proceed.
• Before you can plan your withdrawal plan, you need to know how much money you need for your retirement and whether or not you are on track to have it. Use our free retirement calculator to see how you’re doing.