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

Caselet: Mr. Devendra Rao, aged 62, retired with Rs 80,00,000 in a portfolio and spends Rs 4,80,000 a year. His portfolio is hit by a 25% fall in the first year, before his first withdrawal is made. His adviser suggests holding a cash/liquid bucket for 2 to 3 years of expenses. What is the main benefit of this bucket approach in this situation?

The bucket approach lets Mr. Rao meet expenses from cash or liquid holdings for two to three years, so he does not need to sell equity at depressed prices after a fall. It mitigates sequence risk but does not guarantee returns or remove inflation or longevity risk.

  1. AExpenses can be met without selling equity at depressed pricesCorrect
  2. BThe portfolio is guaranteed not to lose value
  3. CLongevity risk is fully removed
  4. DInflation no longer affects expenses

Explanation

A liquid bucket of 2-3 years of expenses (about Rs 9.6 to 14.4 lakh here) lets the retiree fund spending while growth assets recover, limiting forced sales at low prices. It does not guarantee against loss, nor eliminate longevity or inflation risk.

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