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What is a Systematic Withdrawal Plan



When you set up an investment account so that you automatically take money out on a regular basis (such as monthly) it is called a systematic withdrawal.

Systematic withdrawals are used frequently for mutual fund accounts, annuities, and sometimes for brokerage accounts. When you use a systematic withdrawal for an IRA account you can usually set it up so that federal taxes are automatically withheld from your withdrawal. Some investment firms also allow you to have state taxes withheld.

How Does A Systematic Withdrawal Plan Work?

With a systematic withdrawal shares of your investment are liquidated, or sold, as needed to supply the stated amount of your withdrawal. If you own several mutual funds (or several sub-accounts inside a variable annuity), then shares are sold proportionately to what you own.

For example, let's say you own three mutual funds. Fifty percent of your money is in ABC fund, and 25% each in XYZ and WGT funds. If you set up a $1,000 a month systematic withdrawal, than 50% of your withdrawal amount ($500) would come from ABC fund and 25% each ($250) from XYZ and WGT fund.

Downside To Systematic Withdrawals

The downside to systematic withdrawals is that when your investments are down in value more shares have to be liquidated to meet your withdrawal needs. In a down or sideways market, this can have the reverse effect of a dollar cost averaging strategy, actually lowering your overall rate of return when compared to other withdrawal strategies.

Alternatives To Systematic Withdrawals

One alternative to a systematic withdrawal plan is to keep a year’s worth of withdrawals in a money market fund, taking your monthly withdrawals from this; then rebalancing your account once a year, thus selling investments that had the highest rate of return and using the proceeds to replenish the funds spent from money market.

Other alternatives to a systematic withdrawal plan include:

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