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

Caselet: Rohit, aged 35, wants to build a retirement corpus. He needs Rs 12,00,000 per year in today's money at retirement. Inflation is 5% per year and retirement is 20 years away. Using the first-year expense at retirement as the inflated figure (approximating (1.05)^20 as 2.65), what is the annual expense needed in the first year of retirement?

The first-year retirement expense is Rs 31,80,000. Today's Rs 12,00,000 grows at 5% inflation for 20 years, a factor of about 2.65, so 12,00,000 multiplied by 2.65 gives Rs 31,80,000. Simple-interest or one-year inflation figures understate the need.

  1. ARs 24,00,000
  2. BRs 31,80,000Correct
  3. CRs 12,60,000
  4. DRs 26,50,000

Explanation

Inflated expense = 12,00,000 x 2.65 = Rs 31,80,000. Rs 12,60,000 is only one year of inflation. Rs 24,00,000 uses simple interest (12,00,000 x 2). Rs 26,50,000 wrongly applies 2.65 to 10,00,000.

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