Archive / Investment Adviser (Level 2) / Miscellaneous Aspects of Retirement Planning
nism-series-xb-fixed-deposit-ladder-objective-retiree[ INVESTMENT ADVISER (LEVEL 2) ]
What is the financial planning objective of constructing a 'Fixed Deposit Ladder' for a retired client?
[ A ]Locking 100% of wealth into a single 50-year fixed deposit.
[ B ]Eliminating all income tax liabilities on FD interest.
[ C ]Dividing capital across multiple FDs maturing sequentially across 1, 2, 3, 4, and 5 years, ensuring regular liquidity re-investment opportunities and mitigating interest rate reinvestment risk.[ CORRECT ]
[ D ]FD laddering is prohibited by commercial banks.
Takeaway
The correct answer is C: an FD ladder staggers deposits across multiple maturities (1-5 years) so that a tranche matures every year, giving the retiree recurring liquidity while smoothing reinvestment-rate risk.
Derivation
A retiree who locks the entire corpus into one long FD is fully exposed to whatever rate prevailed on the day of investment and has no liquidity until maturity. Laddering instead splits the corpus into equal tranches maturing in years 1, 2, 3, 4 and 5; each year one tranche frees up, and the adviser reinvests it at the then-prevailing 5-year rate. This produces a rolling average rate across the cycle rather than betting on a single rate, and it guarantees an annual liquidity event without breaking other deposits and forfeiting their accrued interest -- the core planning objective being tested here.
Why the others fail
A — Locking 100% of wealth into a single 50-year fixed deposit.
The opposite of laddering: a single 50-year FD maximizes lock-in and eliminates the annual liquidity events laddering is designed to create.
B — Eliminating all income tax liabilities on FD interest.
FD interest remains fully taxable under Income from Other Sources regardless of laddering; the strategy addresses liquidity/reinvestment risk, not tax.
D — FD laddering is prohibited by commercial banks.
False; FD laddering is a routine, bank-permitted deposit strategy offered by virtually every commercial bank, not a prohibited practice.
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