Why SWP in NIFTY might not be suitable for Retirement Planning

Retirement planning is not just about maximizing returns—it's about ensuring predictability, sustainability, and peace of mind. A recent Monte Carlo simulation using a 14% expected return and 12% standard deviation for an equity mutual fund, with a 9.6% annual withdrawal rate under a Systematic Withdrawal Plan (SWP), highlights a critical risk.

Despite the high expected return, the simulation reveals a 30% probability that the retirement portfolio could be fully depleted during the drawdown phase. This is primarily due to market volatility and sequence of returns risk, which can erode capital rapidly in the initial years of retirement if returns are negative.

On the other hand, investing the same amount in Government of India (GOI) bonds yielding ~7% offers near-zero volatility, predictable cash flows, and capital preservation. While the return is lower, the risk-adjusted outcome is far superior, especially for retirees whose priority is income stability and capital preservation, not capital growth.

Key Takeaways:

• High-return, high-volatility instruments are risky for retirement withdrawals.

• A 9.6% withdrawal rate is aggressive, especially in volatile markets.

• Even with a favorable return expectation, portfolio depletion is a real possibility.

• GOI bonds, though less exciting, offer stability and predictability, aligning well with retirement needs.

Conclusion:

For retirees, minimizing the chance of ruin is more important than chasing returns. A GOI bond strategy may appear conservative, but when the goal is lifelong financial security, it often proves to be the more rational and sustainable choice.