Archive / Investment Adviser (Level 2) / Miscellaneous Aspects of Retirement Planning

nism-series-xb-general-debt-portfolio-closing-balance-outflow[ INVESTMENT ADVISER (LEVEL 2) ]

Mr. Z begins with Rs. 35,00,000 (70% of Rs. 50 Lakhs) in general debt at age 52. He invests 80% of net annual savings each year into debt, earning 8.5% p.a. compound yield (accounting for the Rs. 5 Lakhs outflow at age 55). What is the closing balance of his general debt portfolio at age 60?

[ A ]Rs. 1,47,22,113

[ B ]Rs. 1,65,50,000

[ C ]Rs. 1,80,37,404[ CORRECT ]

[ D ]Rs. 1,95,20,000

Takeaway

Compounding Mr. Z's initial Rs. 35,00,000 debt allocation plus 80% of net annual savings at 8.5% p.a., net of the age-55 outflow, accumulates to a closing debt balance of Rs. 1,80,37,404 at age 60, so option C is correct.

Derivation

Starting with Rs. 35,00,000 (70% of the initial Rs. 50 Lakhs) at age 52, and adding 80% of each year's net annual savings — with the age-55 contribution reduced to reflect the Rs. 5 Lakhs planned outflow that year — the whole balance compounds at 8.5% p.a. through to age 60, reaching Rs. 1,80,37,404. This tests whether a candidate correctly threads the one-off Rs. 5 Lakhs outflow into the middle of an otherwise smooth compounding schedule, since forgetting that adjustment (or applying simple rather than compound growth) produces the distractor values.

Why the others fail

A — Rs. 1,47,22,113

This is the closing debt balance one year early, at age 59 (Year 7), not the full accumulation through to age 60.

B — Rs. 1,65,50,000

Results from calculating interest using simple interest rather than proper annual compounding on the growing debt balance.

D — Rs. 1,95,20,000

Ignores the Rs. 5 Lakhs outflow at age 55 entirely, overstating the closing debt balance by leaving that year's contribution un-reduced.