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

Mr. Raghavan, aged 60, has a retirement corpus of Rs 1,20,00,000 and plans to withdraw Rs 6,00,000 in the first year, increasing by inflation each year thereafter. He wants to know his initial withdrawal rate. Which of the following is his initial withdrawal rate and how should it be interpreted under the commonly used 'safe withdrawal rate' approach?

The initial withdrawal rate is 5%, since Rs 6,00,000 divided by Rs 1,20,00,000 equals 0.05. Under the safe withdrawal rate method this percentage applies only to the first year, and later withdrawals are that rupee amount raised each year by inflation.

  1. A5.0% of the corpus; it is inflation-adjusted each year thereafter, so the rate applies only to the first year's withdrawalCorrect
  2. B0.5% of the corpus; it is a monthly rate and so is well within safe limits
  3. C20% of the corpus; it means the corpus lasts about five years
  4. D5.0% of the corpus; it is recalculated each year on the remaining corpus so the rupee withdrawal stays fixed

Explanation

Initial withdrawal rate = 6,00,000 / 1,20,00,000 = 5%. Under the safe withdrawal rate approach, the rate is applied only to the corpus at retirement; later withdrawals are the first-year rupee amount increased by inflation, not a fresh percentage of the remaining corpus. Hence the option describing recalculation each year on the remaining corpus is wrong, and 0.5% and 20% are arithmetic errors.

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