NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Miscellaneous Aspects of Retirement Planning
Mrs. Nair, 55, needs Rs 6,00,000 in today's terms for annual expenses at retirement. Inflation is 5% and she retires in 2 years. What is the first-year retirement expense, nearest rupee, at retirement? (Use annual compounding.)
The expense at retirement is Rs 6,61,500, obtained by compounding Rs 6,00,000 at 5 percent inflation for two years, that is 6,00,000 multiplied by 1.1025. Simple addition of 10 percent would understate the figure by ignoring compounding.
- ARs 6,60,000
- BRs 6,61,500Correct
- CRs 6,30,000
- DRs 6,00,000
Explanation
6,00,000 × 1.05² = 6,00,000 × 1.1025 = 6,61,500. Rs 6,60,000 uses simple interest (10%), which ignores compounding; Rs 6,30,000 inflates only one year.
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