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

Rohit, aged 40, wants to retire at 60 and expects annual expenses of ₹6,00,000 in today's money. Assuming inflation of 6% a year, his first-year expense at age 60 will be closest to the figure obtained by compounding ₹6,00,000 for 20 years at 6%. Using the factor 3.207 for 20 years at 6%, the expense at age 60 is:

The expense at age 60 is ₹19,24,200. Today's ₹6,00,000 must be compounded at 6% inflation for 20 years, which multiplies it by 3.207. Simple-interest or partial-growth approaches understate the inflated expense.

  1. A₹13,20,000
  2. B₹19,24,200Correct
  3. C₹7,20,000
  4. D₹21,40,000

Explanation

Future expense = 6,00,000 x 3.207 = ₹19,24,200. Adding 6% simple interest for 20 years (6,00,000 x 2.2 = ₹13,20,000) ignores compounding. Using 1.2 gives 7,20,000, which is only a 20% rise. 21,40,000 uses a wrong factor.

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