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Formula sheet/NISM Series X-B: Investment Adviser (Level 2)/Retirement Planning
[ RETIREMENT PLANNING ]

Retirement Living Expenses & Corpus Sizing (Annuity Due)

Expense at Retirement(Year1):Expensesret=Current Living Expenses×(1+rinf)n\text{Expense at Retirement} (Year 1): Expenses_{\text{ret}} = \text{Current Living Expenses} \times ( 1 + r_{\text{inf}} )^{n}
Post-Retirement Real Rate:rreal=[(1+rret)/(1+rinf)]−1\text{Post-Retirement Real Rate}: r_{\text{real}} = [ (1 + r_{\text{ret}}) / (1 + r_{\text{inf}}) ] - 1
Retirement Corpus Required(Annuity Due):Corpus=Expensesret×[1−(1+rreal)−m/rreal]×(1+rreal)\text{Retirement Corpus Required} (\text{Annuity Due}): Corpus = Expenses_{\text{ret}} \times [ { 1 - (1 + r_{\text{real}})^{-m} } / r_{\text{real}} ] \times (1 + r_{\text{real}})
Excel: =PV(r_real, m, -Expenses_ret, 0, 1)
Monthly Accumulation Savings Required: =PMT( r_acc / 12, n × 12, 0, -Retirement Corpus )
Variables

n: Years to retirement; m: Years in retirement (life expectancy); raccr_{\text{acc}}: Accumulation return; rretr_{\text{ret}}: Post-retirement yield. rinfr_{\text{inf}}: Inflation rate.

Exam note

Multiplied by (1 + rrealr_{\text{real}}) because living expenses are incurred in advance at the beginning of each retirement year.

Worked example
Retirement Living Expenses, Corpus Sizing & Accumulation Savings

A 40-year-old individual currently spends Rs 50,000 per month (Rs 6,00,000 p.a.) on living expenses and plans to retire at age 60 (20 working years left). He expects to live for 25 years in retirement (up to age 85). Economic assumptions: Pre- and post-retirement inflation = 8.0% p.a.; Post-retirement investment yield = 9.0% p.a. Pre-retirement accumulation return on investments = 12.0% p.a. Calculate (1) Living expenses in Year 1 of retirement, (2) Total Retirement Corpus required at age 60, and (3) Monthly savings required during the 20-year accumulation phase.