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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Case Studies in Comprehensive Financial Advice

Caselet: Mr. Rohit Sharma, aged 40, wants to retire at 60 and expects to live to 85. His current annual expenses are Rs 6,00,000. Assume inflation of 5% a year until retirement and, for simplicity, that expenses are Rs 6,00,000 x (1.05)^20 at retirement, where (1.05)^20 = 2.65. What is the annual expense in the first year of retirement, as a figure?

The first-year retirement expense is Rs 15,90,000. Current expenses of Rs 6,00,000 are inflated for 20 years at 5%, using the given factor of 2.65, so 6,00,000 multiplied by 2.65 gives Rs 15,90,000 at the start of retirement.

  1. ARs 12,00,000
  2. BRs 15,90,000Correct
  3. CRs 13,25,000
  4. DRs 18,55,000

Explanation

Expense at retirement = 6,00,000 x 2.65 = Rs 15,90,000. Rs 12,00,000 uses a multiple of 2 (wrong factor). Rs 13,25,000 uses simple interest (1 + 0.05x20 = 2 would give 12,00,000; 2.2083 is not used) and is not derived from the given factor. Rs 18,55,000 uses a factor of 3.09, which is incorrect.

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