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

A retiree wants her withdrawals to maintain the same purchasing power every year during retirement. Which approach to annual withdrawals achieves this?

Raising each year's withdrawal by the inflation rate over the previous year's amount keeps purchasing power constant. A fixed nominal amount erodes in real terms, while percentage-of-corpus or interest-only withdrawals fluctuate with market returns and do not track inflation.

  1. AWithdraw a fixed nominal amount each year equal to the first year's withdrawal
  2. BIncrease each year's withdrawal by the expected inflation rate over the previous year's amountCorrect
  3. CWithdraw a fixed percentage of the remaining corpus every year
  4. DWithdraw only the interest earned each year

Explanation

Keeping purchasing power constant requires the nominal withdrawal to grow with inflation. A fixed nominal amount loses real value, a fixed percentage of corpus varies with markets, and interest-only withdrawal gives no inflation-linked amount.

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