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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Miscellaneous Aspects of Retirement Planning

A client aged 58 plans to retire at 60 and fears that unexpectedly poor equity returns just after retirement may deplete the corpus faster than planned, even if long-term average returns are acceptable. Which risk is this?

This is sequence of returns risk. Poor market returns early in retirement, when withdrawals are already being made, erode the corpus permanently, even if average returns over the long run are acceptable, because units are sold at low values.

  1. ASequence of returns riskCorrect
  2. BReinvestment risk
  3. CConcentration risk
  4. DCredit risk

Explanation

Sequence of returns risk arises when poor returns occur early in the withdrawal phase, so withdrawals are made from a shrunken base and the corpus never recovers fully. Reinvestment risk relates to maturity proceeds being reinvested at lower rates, concentration risk to undiversified holdings, and credit risk to issuer default.

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