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

nism-series-xb-two-step-retirement-corpus-formula-fv-then-pv[ INVESTMENT ADVISER (LEVEL 2) ]

What are the two sequential computational steps required to estimate Jaspreet's required retirement corpus?

[ A ]Step 1: Multiply current salary by age; Step 2: Divide by bank interest rate

[ B ]Step 1: Calculate gratuity entitlement; Step 2: Deduct car loan balance

[ C ]Step 1: Calculate Future Value (FV) of annual living expenses at retirement age adjusted for pre-retirement inflation; Step 2: Calculate Present Value (PV) of the inflation-adjusted retirement annuity across the retirement years using the real rate of return[ CORRECT ]

[ D ]Step 1: Purchase equity call options; Step 2: Liquidate all fixed deposits

Takeaway

Jaspreet's required corpus is estimated in two steps: first compounding current expenses to retirement age (FV), then discounting the retirement-year expense stream back using the real rate (PV), so option C is correct.

Derivation

Step 1 compounds today's annual living expense forward to the retirement date using the pre-retirement inflation rate, producing the expense level that will actually be faced in the first year of retirement. Step 2 then treats that inflated figure as the starting payment of a growing annuity over the retirement horizon, discounted at the real rate (derived from post-retirement investment return versus post-retirement inflation) to arrive at the lump sum needed at retirement. This two-step FV-then-PV sequence is the structural backbone of every retirement corpus calculation across this entire case-study set (Mr. Z, Jaspreet, and others), and this question isolates and tests that general methodology independent of any specific numbers.

Why the others fail

A — Step 1: Multiply current salary by age; Step 2: Divide by bank interest rate

Multiplying current salary by age is not a recognised actuarial or financial planning formula for estimating retirement corpus.

B — Step 1: Calculate gratuity entitlement; Step 2: Deduct car loan balance

Gratuity entitlement and car loan balances are separate balance-sheet adjustments, not part of the core living-expense retirement corpus calculation.

D — Step 1: Purchase equity call options; Step 2: Liquidate all fixed deposits

Purchasing speculative equity call options and liquidating fixed deposits are unrelated trading actions, not part of structured retirement goal modelling.