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

Rohan, aged 40, wants to retire at 60. His current monthly expenses are Rs 50,000 and he assumes inflation of 6% per annum. Using the approximation that (1.06)^20 = 3.2, what will be his monthly expense at retirement, in today's lifestyle terms, at the start of year 21 (i.e. after 20 years of inflation)?

Rohan's monthly expense after 20 years at 6% inflation is Rs 1,60,000. This is Rs 50,000 compounded by the factor 3.2. Using simple rather than compound inflation would understate the figure at Rs 1,10,000, which is why compounding must be used for retirement projections.

  1. ARs 1,10,000
  2. BRs 1,60,000Correct
  3. CRs 1,00,000
  4. DRs 3,20,000

Explanation

Future expense = 50,000 x (1.06)^20 = 50,000 x 3.2 = Rs 1,60,000. Rs 1,10,000 wrongly uses simple inflation (6% x 20 = 120% gives 1,10,000). Rs 1,00,000 just doubles the amount, and Rs 3,20,000 multiplies the factor by 2 times 1,60,000 in error.

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