NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Miscellaneous Aspects of Retirement Planning
Mr. Iyer, aged 40, plans to retire at 60. His annual expenses today are Rs 6,00,000 and inflation is assumed at 6% a year. Using the factor 1.06^20 = 3.20, what is his approximate annual expense at retirement?
His annual expense at retirement would be about Rs 19,20,000. Current expenses of Rs 6,00,000 compound at 6% inflation for 20 years, which multiplies them by 3.20. Using simple interest or dividing by the factor would give wrong results.
- ARs 7,20,000
- BRs 19,20,000Correct
- CRs 12,00,000
- DRs 3,75,000
Explanation
Future expense = 6,00,000 x 3.20 = Rs 19,20,000. Rs 7,20,000 adds simple inflation of 6% x 20 years on the base (6,00,000 x 1.2), which ignores compounding. Rs 3,75,000 divides instead of multiplying.
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