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

Rohit Mehra, aged 55, expects to need Rs 60,000 per month in today's money for living expenses at retirement, which starts after exactly 5 years. He assumes inflation of 5% per year. Using annual compounding and rounding to the nearest rupee, what will be his monthly expense requirement in the first month of retirement, in nominal terms? (Use 1.05^5 = 1.27628)

The monthly expense becomes about Rs 76,577. Inflation compounds, so today's Rs 60,000 is multiplied by 1.05 raised to the power 5, which is 1.27628. Simple addition of 25% understates the figure, giving Rs 75,000, which ignores compounding on prior years' increases.

  1. ARs 75,000
  2. BRs 76,577Correct
  3. CRs 79,534
  4. DRs 72,000

Explanation

Future monthly expense = 60,000 x 1.05^5 = 60,000 x 1.27628 = Rs 76,576.8, which rounds to Rs 76,577. Rs 75,000 results from adding 5% simple inflation for 5 years (25%), ignoring compounding. Rs 72,000 uses 4% simple growth, which is not implied by the data. Rs 79,534 would come from using 6 years of compounding (1.05^6 = 1.3401 gives about 80,406, so it is wrong too).

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