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

Mr. Sharma will need Rs 50,000 per month in today's money at retirement, which is 20 years away. Inflation is assumed at 6% a year. Using the approximation that (1.06)^20 = 3.2, what is the monthly expense needed in the first month of retirement?

The monthly expense needed is Rs 1,60,000. Inflation compounds over 20 years at 6%, so the present Rs 50,000 is multiplied by the factor 3.2. Using simple inflation would understate the requirement and leave the client short in retirement.

  1. ARs 1,60,000Correct
  2. BRs 1,10,000
  3. CRs 1,00,000
  4. DRs 2,50,000

Explanation

Future expense = 50,000 x 3.2 = Rs 1,60,000. Rs 1,10,000 wrongly adds 6% x 20 = 120% simple inflation (50,000 x 2.2). Rs 1,00,000 doubles the amount, ignoring compounding.

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