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

Caselet: Mr. Rao, 60, has Rs 80,00,000 corpus, expects annual expenses of Rs 4,00,000 in year 1 (rising with inflation) and wants a sustainable plan. His adviser suggests keeping about two years of expenses in liquid or short-duration debt and the rest in growth assets. What is the main purpose of this approach, known as a bucket strategy?

The bucket strategy aims to fund near-term expenses from liquid or short-term debt so that growth assets need not be sold during a market fall. This reduces sequence-of-returns risk but does not eliminate market risk or guarantee the corpus lasts indefinitely.

  1. ATo avoid selling growth assets in a market downturn to meet expensesCorrect
  2. BTo eliminate all market risk from the portfolio
  3. CTo avoid paying any tax on withdrawals
  4. DTo guarantee the corpus lasts for 40 years

Explanation

A bucket strategy holds near-term needs in stable assets, so growth assets need not be sold at depressed prices, which reduces sequence-of-returns risk. It does not remove market risk, tax or guarantee longevity.

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