NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Retirement Planning Basics
Meera is 40 and plans to retire at 60. Her current annual expenses are Rs 6,00,000. Assuming inflation of 5% per year, which approach correctly estimates her first-year expense at retirement?
Her expense at retirement is found by compounding current expenses at the inflation rate for the 20 years until retirement: Rs 6,00,000 multiplied by 1.05 to the power 20. Simple growth understates, discounting is the wrong direction, and 40 years is the wrong period.
- ARs 6,00,000 x (1.05)^20Correct
- BRs 6,00,000 x (1 + 0.05 x 20)
- CRs 6,00,000 / (1.05)^20
- DRs 6,00,000 x (1.05)^40
Explanation
Expenses grow with compounding inflation over the 20 years to retirement, so the future value is 6,00,000 x 1.05^20 (about Rs 15.92 lakh). Simple interest understates it, discounting reduces it wrongly, and 40 years is the wrong period.
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