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

Mr. Iyer, aged 40, has current annual expenses of Rs 6,00,000. He expects to retire at 60. Assume inflation of 5% a year. Rounded to the nearest thousand, his annual expense in the first year of retirement (at age 60), using (1.05)^20 = 2.6533, is closest to:

The first-year retirement expense is about Rs 15,92,000. Current expenses of Rs 6,00,000 are compounded at 5% inflation for 20 years, using a factor of 2.6533. Simple interest or a wrong number of years gives other figures, which are incorrect.

  1. ARs 12,00,000
  2. BRs 15,92,000Correct
  3. CRs 16,72,000
  4. DRs 12,60,000

Explanation

Future expense = 6,00,000 x (1.05)^20 = 6,00,000 x 2.6533 = Rs 15,91,980, which rounds to Rs 15,92,000. Rs 16,72,000 uses 21 years (x2.7860), a wrong-period error. Rs 12,00,000 is simple doubling and Rs 12,60,000 adds only 5% per year simply over 20 years (6,00,000 x 2.1), ignoring compounding.

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