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

nism-series-xb-stepped-up-contributions-retirement-corpus[ INVESTMENT ADVISER (LEVEL 2) ]

Harish (age 40) plans to retire at age 55 (15 years). His retirement account has an opening balance of Rs. 15,00,000. Total annual contributions start at Rs. 1,20,000 (Rs. 10,000 pm) and step up by 10% each year. The corpus earns an average return of 8% p.a. compounded annually. What is Harish's accumulated retirement corpus at age 55 (rounded)?

[ A ]Rs. 1.14 Crores[ CORRECT ]

[ B ]Rs. 86 Lakhs

[ C ]Rs. 1.00 Crore

[ D ]Rs. 1.32 Crores

Takeaway

Compounding Harish's opening balance and his 10%-stepped-up contributions at 8% p.a. over 15 years accumulates to approximately Rs. 1.14 Crores by age 55, so option A is correct.

Derivation

Starting with an opening balance of Rs. 15,00,000 and adding contributions that begin at Rs. 1,20,000 and step up 10% each year, with the whole corpus earning 8% p.a. compound return, the year-by-year roll-forward (compounding each opening balance and each new contribution at 8%) accumulates to Rs. 1,13,91,775 by age 55, which rounds to Rs. 1.14 Crores. This question tests whether a candidate correctly builds a compounding schedule with two simultaneously growing streams — a fixed lump sum earning a steady return, and contributions that themselves escalate year over year — rather than treating contributions as flat.

Why the others fail

B — Rs. 86 Lakhs

This is the accumulated total if contributions remain flat at Rs. 1,20,000 p.a. every year, ignoring the stated 10% annual step-up in contributions.

C — Rs. 1.00 Crore

This represents the closing balance one year early, at age 54, rather than the full 15-year accumulation through to age 55.

D — Rs. 1.32 Crores

Assumes an inflated 10% annual investment yield on the corpus, rather than the stated 8% return, which overstates the accumulated total.