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

A retiree plans to fund expenses from a corpus and wants to guard against the risk that poor market returns in the first few years of retirement, combined with withdrawals, permanently shrink the portfolio. What is this risk called?

The risk is sequence of returns risk. Poor returns early in retirement, combined with regular withdrawals, force the sale of assets at low prices and can permanently reduce the corpus, even if long-term average returns are acceptable.

  1. ASequence of returns riskCorrect
  2. BReinvestment risk
  3. CLiquidity premium risk
  4. DCounterparty risk

Explanation

Sequence of returns risk arises when negative returns occur early in the withdrawal phase; withdrawals then sell units at low prices and the corpus may not recover. Reinvestment risk relates to reinvesting coupons or maturity proceeds at lower rates, so it does not describe this situation.

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