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

Meera, aged 58, plans to retire at 60 and expects to live to 85. Her first-year retirement expense is Rs 6,00,000, rising 5% a year, and the corpus earns 5% a year after retirement. Assuming expenses are drawn at the start of each year, which statement correctly describes the real-return approach for sizing her corpus?

When the post-retirement return equals inflation, the real return is nil, so the corpus is roughly the first-year expense multiplied by the years of retirement: Rs 6,00,000 x 25 = Rs 1.5 crore.

  1. ABecause the inflation rate equals the return, the real return is about zero, so the corpus needed is roughly the first-year expense times the number of years (25 years), about Rs 1.5 croreCorrect
  2. BThe corpus needed is Rs 6,00,000 divided by 5%, which equals Rs 1.2 crore
  3. CThe corpus needed is Rs 6,00,000 times 25 years times 1.05, about Rs 1.575 crore
  4. DThe corpus needed cannot be estimated without knowing her pre-retirement income

Explanation

With return equal to inflation the real return is nil, so with start-of-year withdrawals the corpus approximately equals 6,00,000 x 25 = Rs 1.5 crore (exact under the nominal-growth assumption). The perpetuity approach of Rs 1.2 crore wrongly assumes expenses never end and ignores inflation.

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