SWP Versus Annuity: Better Way To Get Monthly Income?

Most people start retirement planning with one goal.

“I need a fixed monthly income.”

So they do the most common thing.

They try to live off interest or dividends, and keep the principal untouched.

That works, but it is not the only way.

There’s another popular method called a Systematic Withdrawal Plan (SWP). If you want a quick explainer before you go deeper, read what an SWP is.

An SWP flips the logic.

Instead of depending on payouts, you withdraw a fixed amount yourself, and the remaining corpus keeps compounding. You can also try the numbers on the SWP calculator.

So which one is better, and why?

Context

• Annuity style means you try to live mainly on interest or dividend, and keep the principal broadly intact.
• SWP style means you withdraw a planned amount, and the corpus reduces gradually over your chosen tenure.
• SWP can create higher monthly cashflow for a fixed period because it uses both returns and principal over time.
• Tax treatment can be friendlier in SWP since only the gains portion is taxed as capital gains.
• SWP needs a good structure since bad markets early on can hurt the plan.

The core difference: what happens to your corpus

Annuity-style income

• The original principal is kept static.
• Monthly income comes from interest or dividend generated on the principal.
• The corpus stays mostly intact, which can help if you want to leave a legacy.

SWP-style income

• There may or may not be regular payouts from the fund.
• You decide the monthly amount you need, and withdraw that amount.
• The corpus is gradually depleted over a planned period like 20 to 25 years, so the money gets used more efficiently.

Annuity vs SWP: side-by-side

The numbers that make people notice

Example 1: Annuity-style monthly income

A corpus of ₹2 crore invested in a liquid fund giving 5% annualised returns can offer a monthly annuity of ₹83,333, keeping the corpus intact.

Simple math:

• ₹2,00,00,000 × 5% = ₹10,00,000 per year
• ₹10,00,000 / 12 = ₹83,333 per month (approx.)

This is pre-tax. Post-tax will be lower.

Example 2: SWP-style monthly withdrawals

A similar ₹2 crore corpus in an SWP over 20 years at 8.2% yield can generate monthly withdrawals of ₹1,70,000 for 20 years.

That is the big appeal.

It uses the corpus over time instead of preserving it fully. To see how the math behaves with different inputs, use the SWP calculator.

How does SWP maths work versus annuity?

Annuity maths

Straightforward.

If you want stable monthly dividends, you typically avoid high risk. You assume best-case returns of 5% to 6% per annum.

So you get a monthly flow like:

• ₹83,333 per month at 5%
• ₹1,00,000 per month in a best-case scenario

Again, this is pre-tax.

SWP maths

SWP does not require the fund to pay regular dividends.

So you can structure the portfolio to target a higher long-term return, while still staying reasonable on risk.

In this illustration:

• Starting corpus: ₹2 crore
• Assumed annual returns: 8.2%
• Monthly withdrawal: ₹1.70 lakhs
• Annual withdrawal: ₹20.40 lakhs
• Tenure: 20 years

The corpus winds down steadily.

How do the SWP flows look like?

Assumption: Start with ₹2 crore, earn 8.2% annually, withdraw ₹20.40 lakhs every year (which is ₹1.70 lakhs per month).

20-year winding-down table

By the end of 20 years, the corpus is down to ₹12.85 lakhs.

This shows how ₹2 crore can be used efficiently to create monthly cashflow for a defined retirement period.

Taxation: why SWP can look better on paper

Annuity-style taxation

If you rely on interest or dividends from a debt fund, those payouts are fully taxable at your slab rate.

That can significantly reduce post-tax income.

SWP taxation

In an SWP, withdrawals are taxed as capital gains, and only the gains portion of the withdrawal is taxed.

The principal portion is not taxed again.

If you want a simple breakdown with examples, read is SWP taxable in India.

When annuity can still make sense

Annuity-style income can work well if:

• You want the corpus intact for children or dependents.
• You want low moving parts, and you prefer simplicity.
• Your monthly need is lower, and interest or dividend income is enough.
• You value predictability over maximising monthly cashflow.

When SWP can go wrong

SWP is not magic. It is a system, and systems break under stress if built poorly.

• Sequence of returns risk: If markets fall early in retirement, withdrawals can damage the corpus faster.
• Inflation mismatch: A fixed ₹1.70L may feel fine today, but expenses rise.
• Over-withdrawal: If the withdrawal is too high, the plan can run out early.
• Wrong asset mix: Too conservative reduces longevity, too aggressive increases volatility.
• Behaviour risk: People change withdrawals impulsively in bad years.

To stress-test your plan, start with your target corpus and timeline. Many people first estimate their FIRE corpus, then design withdrawals around it. You can calculate a starting number using the FIRE calculator.

Simple Selection Framework

Ask these questions:

1. Do I need to preserve corpus for heirs, or is my priority monthly cashflow for my life?
2. Can I handle a plan where corpus reduces over time, if it supports a better lifestyle now?
3. Do I want flexibility, like changing withdrawal amount later?
4. Can I accept that returns are not guaranteed, and I need a structure that can survive bad years?
5. Would a mix work, like keeping a safety bucket for essentials and using SWP for lifestyle spends?

Key takeaways

• Annuity-style income preserves principal, but monthly cashflow is usually lower.
• SWP uses the corpus over time, and can produce higher monthly withdrawals for a fixed tenure.
• The ₹2 crore example shows ₹83,333 per month at 5%, versus ₹1,70,000 per month via SWP at 8.2% assumed yield for 20 years.
• SWP can be more tax-efficient since capital gains apply only on the gains portion.
• SWP needs risk controls, especially for early bad market years.

FAQs

1. Is SWP better than annuity for retirement income?

Often yes if you want higher monthly cashflow for a fixed period and you are okay with the corpus reducing over time. Annuity-style income keeps the principal largely intact, but monthly income is usually smaller because it depends mainly on interest or dividends.

2. Does SWP guarantee monthly income?

No. SWP is a withdrawal method, not a guarantee. You can set a monthly withdrawal, but portfolio returns are not assured, so the plan may need changes if markets are weak early on.

3. How is SWP taxed in India?

SWP withdrawals are treated as redemptions. Tax applies as capital gains, and only the gains portion of each withdrawal is taxed. The principal portion is not taxed again. For a simple explainer, see is SWP taxable in India.

4. What is sequence of returns risk in SWP?

It is the risk of poor returns early in retirement. Withdrawals during a downturn can reduce the corpus faster because you sell more units at lower prices, which can make recovery harder later.

5. Can I leave money for children with SWP?

You can, but it needs planning. Since SWP is designed to draw down the corpus over a tenure, the residual amount can be small near the end. If legacy matters, consider a separate bucket or a blended structure.

6. Should I combine annuity and SWP?

Many people do. One common structure is to keep essential expenses covered by a safer, more stable income method, and use SWP for lifestyle expenses where flexibility helps. This also reduces stress during bad markets.

Disclaimer: This content is for education only and is not a recommendation. Returns and tax rules are not guaranteed and can change. Always evaluate suitability based on your goals, time horizon, risk tolerance, and latest regulations.