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

Rohit Mehra, aged 40, expects to retire at 60. His current annual expenses are Rs 6,00,000. Assuming inflation of 5% per annum, which approach correctly estimates his first-year expense at retirement, before applying any replacement ratio adjustment? (Use (1.05)^20 = 2.65)

Compound the current expense at the inflation rate over the years remaining: Rs 6,00,000 multiplied by 2.65 gives Rs 15,90,000. Using simple growth understates the figure, while discounting reduces it wrongly, because inflation increases future costs rather than lowering them.

  1. ARs 6,00,000 x 2.65 = Rs 15,90,000Correct
  2. BRs 6,00,000 x (1 + 0.05 x 20) = Rs 12,00,000
  3. CRs 6,00,000 / 2.65 = Rs 2,26,415
  4. DRs 6,00,000 x 2.65 x 2.65 = Rs 42,13,500

Explanation

Expenses grow with compound inflation over 20 years, so future expense = 6,00,000 x 1.05^20 = 6,00,000 x 2.65 = Rs 15,90,000. Simple-interest growth (Rs 12,00,000) ignores compounding, and dividing by 2.65 discounts instead of compounding.

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