NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Retirement Planning Basics
Mr. Raghav Iyer, aged 40, has current annual expenses of Rs 6,00,000. He plans to retire at 60 and assumes inflation of 5% a year. Using the approximation that expenses grow by (1.05)^20 = 2.65, what will his first-year annual expense at retirement be, approximately?
His expense at retirement will be about Rs 15,90,000. Current expenses of Rs 6,00,000 compound at 5% inflation for 20 years, a factor of 2.65, giving 6,00,000 x 2.65. Ignoring compounding or inflating for just one year understates the figure.
- ARs 12,00,000
- BRs 15,90,000Correct
- CRs 6,00,000 x 1.05 = Rs 6,30,000
- DRs 18,00,000
Explanation
Inflated expense = 6,00,000 x 2.65 = Rs 15,90,000 over 20 years. Rs 12,00,000 would use simple doubling, ignoring compounding. Rs 6,30,000 inflates for only one year. Rs 18,00,000 would result from using a multiple of 3, which is not the data given.
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