Archive / Investment Adviser (Level 2) / Retirement Planning Basics

nism-series-xb-sequence-of-returns-risk-retiree-withdrawal-example[ INVESTMENT ADVISER (LEVEL 2) ]

Two retirees (Retiree X and Retiree Y) start with identical ₹2.0 Crore portfolios and withdraw ₹12 Lakhs/year. Both portfolios experience the EXACT SAME 5-year average annual return of +10%. However, Retiree X suffers negative returns (-20%, -10%) in the first 2 years, while Retiree Y enjoys positive returns (+30%, +25%) in the first 2 years. What will be their terminal financial outcome?

[ A ]Both retirees will end up with the exact same rupee wealth down to the last paisa.

[ B ]Retiree X will face SEVERE PORTFOLIO DEPLETION (or ruin) because withdrawing fixed cash during early negative years permanently destroys unit volume, while Retiree Y will have a thriving, growing portfolio.[ CORRECT ]

[ C ]Retiree X will have double the wealth of Retiree Y.

[ D ]Both portfolios will automatically convert into physical gold.

Takeaway

The correct answer is B: despite identical 5-year average returns, Retiree X (who suffers early losses while withdrawing) will face severe portfolio depletion or ruin, while Retiree Y (who enjoys early gains) ends up with a thriving portfolio -- illustrating that the sequence of returns matters, not just the average.

Derivation

When fixed withdrawals are taken during a period of negative returns, more units/shares must be sold to raise the same rupee amount, permanently reducing the units left to participate in any later recovery -- there's no way to 'buy back' the units sold at depressed prices. Retiree X, hit by -20% and -10% in years 1-2 while still withdrawing ₹12 lakhs annually, locks in this permanent unit erosion early, so even if returns average out to +10% over 5 years, the portfolio never fully recovers. Retiree Y, by contrast, benefits from early gains (+30%, +25%) that grow the base before any heavy depletion occurs, letting withdrawals be funded from a larger, still-growing balance. This is the textbook illustration of sequence-of-returns risk in retirement decumulation.

Why the others fail

A — Both retirees will end up with the exact same rupee wealth down to the last paisa.

Ignores sequence-of-returns risk entirely; identical averages produce very different terminal wealth when regular withdrawals interact with the timing of losses.

C — Retiree X will have double the wealth of Retiree Y.

Reverses the actual outcome; it is Retiree Y (early gains) who ends up materially wealthier than Retiree X (early losses), not the other way around.

D — Both portfolios will automatically convert into physical gold.

Absurd and irrelevant; portfolios do not convert into physical gold -- the real outcome concerns differential depletion driven by return sequencing.