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

Caselet: Mr. Khanna's adviser divides his retirement corpus into a short-term bucket of cash and liquid funds for the next few years of expenses, and longer-term buckets in debt and equity. What is the main purpose of this bucket approach?

The bucket approach mainly lets the retiree avoid selling growth assets during a market downturn. Near-term expenses are funded from cash and liquid holdings, while longer-term buckets stay invested, which reduces sequence-of-returns risk. It guarantees no return and removes neither inflation nor tax.

  1. AGuarantee a fixed return on the whole corpus
  2. BAvoid selling growth assets in a market downturn to meet expensesCorrect
  3. CEliminate the need to consider inflation
  4. DRemove all taxation on withdrawals

Explanation

Holding near-term expenses in safe, liquid assets lets equity and other growth assets stay invested through downturns, reducing sequence-of-returns risk. It does not guarantee returns, remove inflation risk or tax.

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