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

nism-series-xb-jaspreet-retirement-corpus-estimation-8-percent-inflation[ INVESTMENT ADVISER (LEVEL 2) ]

Jaspreet (age 40) requires Rs. 50,000 pm (Rs. 6,00,000 p.a.) for living expenses today. He plans to retire at age 60 (20 years) and fund 25 years in retirement. Inflation is 8% p.a. and investment returns in retirement are 9% p.a. (real rate = 0.9259%). What is the estimated retirement corpus required at age 60 (rounded)?

[ A ]Rs. 1.5 Crores

[ B ]Rs. 3.5 Crores

[ C ]Rs. 4.8 Crores

[ D ]Rs. 6.2 Crores[ CORRECT ]

Takeaway

Compounding Jaspreet's current expenses to age 60 and discounting the 25-year retirement stream at the real rate gives a required corpus of approximately Rs. 6.2 Crores, so option D is correct.

Derivation

Step 1: Living expense at age 60 = FV(8%, 20, , -6,00,000) = Rs. 27,96,574.29. Step 2: Real rate = ((1.09)/(1.08)) - 1 = 0.9259%. Step 3: Corpus required = PV(0.9259%, 25, -27,96,574.29) = Rs. 6,21,56,919, rounding to Rs. 6.2 Crores. This tests the same two-step FV-then-PV retirement methodology used across the case studies, and specifically probes whether candidates correctly compound the full 20 pre-retirement years before switching to the post-retirement real-rate discounting over 25 years.

Why the others fail

A — Rs. 1.5 Crores

Obtained if the future inflation impact over the 20 pre-retirement years is ignored entirely, using today's expense figure instead of the inflated Year-20 figure.

B — Rs. 3.5 Crores

Results from applying the 9% nominal return as the discount rate during retirement without adjusting for post-retirement inflation, understating the true corpus need.

C — Rs. 4.8 Crores

This is the corpus needed to fund only 15 years of retirement rather than the full stated 25-year retirement horizon.