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

Meera, a 58-year-old, has a retirement corpus of Rs 1.2 crore and expects to withdraw Rs 6 lakh in the first year of retirement. Which of the following is the initial withdrawal rate, and how should it be treated in a typical 'constant real withdrawal' approach?

The initial withdrawal rate is 5%, since Rs 6 lakh divided by Rs 1.2 crore is 0.05. Under a constant real withdrawal approach, the amount is raised every year by inflation so that purchasing power stays unchanged, rather than staying fixed in nominal rupees.

  1. A5%; the Rs 6 lakh is stepped up each year by inflationCorrect
  2. B5%; the Rs 6 lakh stays fixed in nominal terms every year
  3. C2%; the Rs 6 lakh is stepped up each year by inflation
  4. D12%; the Rs 6 lakh is stepped up each year by inflation

Explanation

Withdrawal rate = 6 lakh / 120 lakh = 5%. In a constant real withdrawal approach, the first-year amount is increased each year by inflation to hold purchasing power. Keeping it fixed nominally is not constant real withdrawal, and 2% and 12% are miscalculations of the ratio.

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