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

Caselet: Ms. Iyer, aged 60, retires with a corpus of Rs 1,00,00,000 and plans to withdraw Rs 4,00,000 at the start of the first year, rising with inflation each year. Which statement best describes the risk of a high initial withdrawal rate combined with poor equity returns in the first few years of retirement?

This is sequence of returns risk. When poor market returns occur early in retirement while withdrawals continue, the corpus shrinks and cannot fully recover later, even if average returns are acceptable over the long term. It differs from longevity risk, which concerns outliving the corpus.

  1. ALongevity risk
  2. BSequence of returns riskCorrect
  3. CReinvestment risk
  4. DLiquidity premium risk

Explanation

Poor returns early in retirement, while withdrawals are being made, deplete the corpus permanently and reduce what remains to recover later. This is sequence of returns risk. Longevity risk concerns living longer than expected, and reinvestment risk concerns reinvesting maturing proceeds at lower rates.

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