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

Rohit, aged 40, has monthly expenses of Rs 50,000 today. He plans to retire at 60 and assumes expenses grow with inflation of 6% a year. Using the approximation (1.06)^20 = 3.2, what will be his estimated monthly expense at retirement, assuming expenses stay the same in real terms?

The monthly expense at retirement is about Rs 1,60,000. Inflation compounds over 20 years at 6%, so the current Rs 50,000 is multiplied by 3.2, not grown by simple interest.

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

Explanation

Future expense = 50,000 x 3.2 = Rs 1,60,000. Rs 1,10,000 wrongly adds 6% simple for 20 years only partly (50,000 x 2.2 = 1,10,000, i.e. simple interest 120% less ... a simple-interest style error). Rs 1,20,000 is simple interest 6% x 20 = 120% added to give 1,10,000? Actually it ignores compounding, so it is wrong.

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