Retirement Planning Workbook

(c) 1 cash purchase (d) None of the above 87. People often the cost of living in retirement and therefore they are under-funded. (a) Overestimate (b) Properly estimate (c Underestimate (d) None of the above 88. People should aim to (a) Take a loan for children’s marriage just prior to retirement (b) Have paid off their loans, debt and home mortgages (c) Invest in highly illiquid assets (d) None of the above 89. While selecting investments and budgeting for living expenses the following facts should be taken into consideration (a) Living expenses are more in cities than rural area (b) Increase in medical cost (c) Possible travel cost during the retirement period (d) Price rise due to inflation (e) All the above 90. What reduces the purchasing power of money? (a) Inflation (b) Deflation (c) Decline in income (d) All the above 90. A retirement budget prepared 5 or more years prior retirement age will be less reliable than current year’s budget in estimating expenditures, (a) Due to possible changes in budget categories. (b) As there will not be any changes during 5 years (c) Inflation and interest rates will remain unchanged. (d) All the above 91. Preparation of a detailed personal budget after retirement can highlight Page 101 (a) Needs and estimated cash requirements in retirement CFP Level 2 - Module 1 – Retirement Planning - Workbook

(b) Mortgage and other loans (c) Independent children’s needs (d) None of the above 92. Retirement Planning requires two important factors to be considered: (a) Estimating expenses during retirement; (b) Identifying sources of income during retirement. (c) A & B above (d) None of the above 93. Mr. Rege has invested Rs. 1,00,000 with Bank for 5 years @ 6% p.a. compounding every year, how much interest he will get at the end of 5 years. (a) 30522,56 (b) 33822.56 (c) 31522.60 (d) 32822.60 94. Mr. Vinay and his wife require annual income of Rs. 100000 p.a.in the beginning for 15 years. How much amount he has to invest when the rate of interest is 5%. (a) Rs. -10,89,864.1 (b) Rs. 9,62,034 (c) Rs. 9,00,000 (d) Rs. 9,26,043 95. The main sources of retirement income include: (a) Superannuation benefits viz. Provident fund, Gratuity, etc. (b) earnings from personal investments; (c) income from part-time work (d) all the above (e) None of the above. 96. A financial planner should consider the following issues (a) understand a client ’s personal needs and mental attitude (b) Clients require a long-term and trusting relationship; (c) explain the risk and return of investments; (d) help clients to develop a plan of action, especially if they are made redundant or retrenched; CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 102

(e) explain the pitfalls associated with financial aspects of retrenchment and/or retirement packages; (f) suggest restructuring or consolidating debts and investments; and (g) explain options with superannuation, salary packaging, risk protection, capital gains from sale of business assets, and estate planning (h) All the above (i) None of the above 97. Identify and list some other important issues in retirement planning. (a) Health (b) Finances (c) Home (d) Interest, hobbies & work (e) Relationships (f) All the above 98. What are the different approaches that you can tell your client at pre-retirement stage? (a) Do not retire at all —just change the jobs. (b) Do nothing and love every minute of it (d) Accept some limitations and keep going (c) Become a ‘Senior Citizen’ (e) Fight old age to the death (f) All the above (g) None of the above 99. What are the risk areas in retirement planning which should be considered closely by the planner (a) taking a big trip (b) starting a new business (c) Giving gifts. (d) All the above (e) None of the above 100. Present value of required future annual income stream is calculated by using the (a) PV =Income payment x [1 – ((1+i) -n ] / i ; i rate of interest, n is estimated number of retirement years (b) PV = Income / i (c) PV = Income/ (1+ I) n (d) None of the above CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 103

101. In service withdrawals are permitted under all the qualified plan (a) True (b) False 102. All the qualified plans give loan facility (a) True (b) False 103. Government servant can commute for cash value. (a) 75% of his basic pension (b) 48 % of his total pension (c) 50% of his basic pension and daily allowance (d) 40 % of his basic pension 104. Public Sector Employees’ Index linked final salary based pension is applicable to the employees of (a) Bank (b) Insurance companies (c) Telecommunication companies (d) Defence 105. Funding contributions in these Public sector organizations pensions are made out of (a) Their own earnings (b) The government revenue (c) Their own earnings and government grant (d) Public provident fund 106. Statutorily, employers employing employees have to provide provident fund benefit (a) Less than 10 (b) 20 or more (c) 10 or 15 (d) Exactly 10 107. Employers employing employees have to provide “gratuity” or “severance pay”. Page 104 (a) 10 or more (b) 5 to 7 (c) Less than 10 CFP Level 2 - Module 1 – Retirement Planning - Workbook

(d) None of the above 108. The gratuity as per Payment of Gratuity (a) @ 10 days salary per year of service (b) @ 15 days salary per year of service (c) @ 30 days salary per year of service (d) @ 45 days salary per year of service 109. The amount of the monthly pension will be calculated as (a) 1/70th of the Pensionable salary for each year of Pensionable service The Pensionable salary is average final salary subject to the limit of Rs. 6500 (or the higher salary on which basis contribution was made). (b) As 1/66th of the average final salary for each year of pensionable service subject to a maximum of 50%. (c) 50% of final salary irrespective of number of years service (d) None of the above 110. Up to of the pension can be commuted under EPS 1995. (a) one-third (c) 3/4 (b) 50% (d) None of the above 111. Interest income on provident fund contributions is (a) Taxable (b) Partially taxable (c) Tax free (d) None of the above 112. Name the broad categories of pension schemes (a) Employer Pensions (b) Occupational Pensions (c) Personal pensions offered by life insurers and mutual funds (d) All above 113. The annuity starts immediately after one month from the date of purchase and continues for a specified period of time and payment of this annuity does not depend upon the death of annuitant during that period is known as CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 105

(a) Immediate Life annuity (b) Immediate annuity certain (c) Deferred annuity (d) Last survival annuity (e) All above 114. The annuity provides benefits for more than one life and generally written on the lives of two people self and spouse. The annuity continues to be paid until last person dies is known as. (a) Immediate Life annuity (b) Immediate annuity certain (c) Deferred annuity (d) Last survival annuity (e) All above 115. Personal pension products (deferred as well as immediate annuity) for regular retirement income may be purchased by (a) The any person, self-employed businessmen, traders, professionals etc. (b) Only people working at private companies (c) Only government servants (d) None of the above 116. The issuer of annuities or personal pension products are (a) Banks (b) Stock exchanges (c) Insurance companies (d) Mutual funds (e) None of the above 117. Personal pension products such as deferred as well as immediate annuity are the main instruments avail- able for making regular retirement income provision are not very popular in India due to (a) Relatively lower return (b) Availability of ample financial instrument yielding good returns (c) Lack of widespread awareness (d) All the above (e) None of the above CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 106

ANSWERS TO PRACTICE QUESTIONS – V 1. b 2. d 3. b 4. a 5.d 6. b 7. c 8b 9.a 10. c 11. c 12. c 13. c 14. c 15. d 16. a 17. c 18. b 19. a 20. c 21. b 22. c 23. b 24. b 25. a 26. c 27. b 28. c 29. c 30. b 31. d 32. c 33. a 34. b 35. c 36. a 37. b 38. c 39. c 40. d 41. a 42. d 43. a 44. d 45. b 46. a 47. a 48. a 49. d 50. d 51. h 52. b 53. c 54. h 55. b 56. a 57. c 58. d 59. c 60. c& d 61. e 62. e 63. a 64. d 65. b 66. a 67. a 68. b 69. d 70. c 71. c 72. a 73. c 74. b 75. c 76. b 77. a& b 78. a 79. c 80. d 81. c 82. c 83. a 84. a 85. b 86. a 87. c 88. b 89. e 90. a 91. a 92. a 93. c 94. a 95. a 96. d 97. a 98. f 99. f 100. d 101. a 102. b 103. b 104. d 105. a & 106. a 107. b 108. b 109. b 110. a 111. a 113. d 114. b 115. d 116. a 117. c b 112. c CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 107

PRACTICE QUESTIONS – VI 1. Employees Provident Fund is applicable to firms employing over employees. (1 Mark) (a) 20 (b) 15 (c) 10 (d) 25 2. An employee can contribute beyond of his salary his salary towards EPF but he will get tax benefits u/s 80C only up to (1 Mark) (a) 11.33, 11.33 (b) 10, 10 (c) 150000 (d) 8.33, 8.33 3. Contributions to an Unrecognized Provident Fund will result in: (1 Mark) A. Taxing of Interest Income earned by the employee on employer contributions B. Employer cannot treat the PF Contribution as a deductible business expense. C. No Rebate u/s 80C to the employee (a) A & C (b) A (c) B (d) B & C 4. % of Gratuity received on retirement by a Central Government employee is taxable. (1 Mark) (a) Ten (b) Nil (c) Twenty-Five (d) Twenty (e) Thirty-Three 5. Gratuity is categorized as a Plan. (1 Mark) (a) Defined Benefit (b) Defined Contribution (c) Combination of Defined Benefit and Defined Contribution CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 108

6. Pensions received from an employer are classified under: (1 Mark) (a) Income from other sources (b) Profits in Lieu of salary (c) Income from Salaries 7. While determining the taxability of Gratuity, the term Salary usually includes. (1 Mark) (a) Basic + House Rent Allowance (b) Basic + Dearness Allowance (c) Basic + Uniform Allowance 8. Leave Salary received during the tenure of employment is (1 Mark) (a) Fully exempt (b) Exempt up to a certain ceiling (c) Fully taxable 9. Real returns is defined as (1 Mark) (a) Nominal returns adjusted for inflation. (b) Nominal returns adjusted for time value of money. 10. In an inflationary period which of the following statement holds true: (1 Mark) (a) Nominal interest rates are lower than real interest rates. (b) Nominal interest rates are higher than real interest rates. (c) Nominal interest rates are equal to real interest rates. 11. What will be the effect in terms of buying power on today™ Rs. 50000.00 after 15 years if inflation is 8% p.a? (2 Marks) (a) It will be worth Rs. 14584.00 (b) It will be worth Rs. 16412.00 (c) It will be worth Rs. 14921.00 (d) It will be worth Rs. 15762.00 12. If the inflation rate is 4.9% and tax rate is 30%. The required rate of return to maintain the value of an investment is . (2 Marks) (a) 8% (b) 9% (c) 7% (d) 10% CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 109

13. Seema has been an employee of a public sector undertaking (covered under the payment of Gratuity Act, 1972) for the past 21 (completed) years and is retiring today. She hopes to invest the proceeds along with the PF proceeds, in order to fund her retirement. Her monthly salary at retirement is expected to be Rs. 20,000. The amount of gratuity that she will receive will be (4 Marks) (a) 241245 (b) 242308 (c) 243579 (d) 241940 14. Mr. Sachin, aged 30, wants to retire at 45. He wants to maintain his present living standard. He spends Rs.500000 a year. He is expected to live upto 75. Inflation is to be assumed at 5% and expected returns are 7% p.a. What is the real rate of return? (4 Marks) (a) 1.75 (b) 1.90 (c) 2.05 (d) 2.15 15. Aditi is 30 years old. She deposits 25000 in the beginning of each year in deferred annuity scheme as a part of her retirement planning. How much will be in the account after 25 years if it earns 9.5% compound annual interest? (4 Marks) (a) 2474985 (b) 2487216 (c) 2414854 (d) 2497857 16. Sumeet, aged 25 plans to retire at age 55. His life expectancy is 75. His current annual expenditure is Rs. 250000. He estimates no reduction in his expenses post-retirement. If interest rate is expected to be 8.5% and inflation is 5% p.a. estimate how much will he have to save per annum in order to achieve his target, provided he does not wish to leave an estate. (4 Marks) (a) Rs. .119538 (b) Rs. 125054 (c) Rs. 129696 (d) Rs. 120963 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 110

ANSWERS TO PRACTICE QUESTIONS – VI 1. (a) 2 0 2. (c) 150000 3 (a) A & C 4 (b) Nil 5. (a) Defined Benefit 6. (c) Income from Salaries 7. (b) Basic + Dearness Allowance 8. (c) Fully taxable 9. (a) Nominal returns adjusted for inflation. 10. (b) Nominal interest rates are higher than real interest rates. 11. (d) It will be worth Rs. 15762.00 Working Note: FV = Rs. 50000; r = 8%; n = 15 years; Hence PV = Rs. 15762.00. 12. (c) 7% Working Note: If 4.90% is the post-tax rate of returns, then the pretax nominal return = 4.9%* (100/70) = 7%. 13. (b) 242308 Working Note: Gratuity calculation = 15/26*20000*21 = 242308. 14. (b) 1.90 Working Note: Nominal return (N) = 7%; Inflation (I) = 5 %; Real Rate = {(1+ N)/ (1+ I)} - 1 = 1.90% 15. (d) 2497857 Working Note: Use FV function; Begin : PMT = 25000 Type = 1; n = 25; r = 9.5 %; Hence FV = Rs. 2497857 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 111

16. (c) Rs. .119538 Working Note: In order to find the quantum of saving per annum we need to find 1) The future value of current expenditure (2) The Present Value of the corpus required in order to fund such expenditure post-retirement (3) The actual quantum of savings required (PMT). (a) Future Value of Current Expenditure :Rs. 10,80,4.86; where the PV = Rs. 250000 r = 5% n = 30 (b) Find the Present value of Annuity Due for the next 20 years. Use inflation adjusted return. Hence PV (AD) = Rs. 16, 110,166; where inflation adjusted return = 3.33 %, n = 20 years and PMT = Rs. 1080486. (c) Now find the quantum to be saved per annum upto the year of retirement i.e. PMT. Hence PMT = Rs.129696; where FV = Rs. 16, 110,166; r = 8.5%; n = 30 years, Set = Begin CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 112

SECTION–1 1. Raman is 40 years old. His annual family expenses are Rs.7 Lakh. He will retire at age 62. During this period, average inflation is expected to be 6% p.a. He wishes to provide for 35 years after retirement. If the inflation in the post retirement period is 4% p.a. and expected return on investments is 7% p.a. how much corpus is required for retirement? (3 marks) a) Rs.5.00 crores b) Rs.4.69 Crores c) Rs.5.67 crores d) Rs.5.98 crores 2. A retired couple estimates that they may live another 20 years after retirement and would like to have an annual income of Rs.2, 40,000. If the rate of return on investments is assumed to be 8% per annum, what amount of should they have at retirement to provide for their needs? (2 marks) a) 2544864 b) 2456789 c) 3456987 d) 2765433 3. Ramesh is 35 years old and started a program of depositing Rs.40,000 at the beginning of every year in a deferred annuity scheme as part of his retirement plan. How much amount will he accumulate for his retirement needs? The rate of return on investments is 9.5% p.a. and the rate of inflation is 5.5% p.a. He will retire at age 55. (2 marks) a) Rs.2546789 b) Rs.23,70,554 c) Rs.30,00,000 d) Rs.2567345 4. The current household expenses of Mr. X, aged 30, are estimated to be Rs.400000 p.a. If the inflation rate is assumed to be 6% p.a. calculate the household expenses of Mr. X at the time of his retirement, if he plans to retire at age60 and will require only 75% of the last spend? (3 marks) a) 2297396 b) 2017058 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 113

c) 3044902 d) 1723047 5. Mr. Mansukh aged 30 years is working as a senior analyst with an annual salary of Rs.800000. He bought a house with a loan amount of Rs.3000000 to be paid in next 16 years with an interest rate of 8% p.a. reducing monthly. Assume he pays EMI in the end of the month. Compute the amount of EMI on housing loan and total interest paid by him? (3 marks) a) 27563.99, 2292286 b) 17747.75, 2327568 c) 27748, 2327568 d) 28856,2345678 6. Mr. Y retired from XYZ Ltd. after completing 30 years 9 months. Salary at the time of retirement is Rs.11500 p.m. Actual gratuity received is Rs.455000. Average salary for previous 10 months is Rs.9350. Calculate the exempted amount of gratuity if XYZ Ltd. is not covered under Payment of Gratuity Act? (3 marks) a) Rs.20,00,000 b) Rs.140250 c) Rs.144925 d) Rs.161827 7. Mr. Pawar is a 30 year old, self-employed person is saving Rs.30,000 per annum in PPF account. He has been saving for the last 5 years. He is willing to look at a lifestyle after retirement that fits into a fixed Rs.3lakhs p.a. spend for 15 years. What is the spending opportunity for him, at the time of his retirement of age 60 given his savings and assume a rate of 6% on his funds after retirement. (Compounded annually, assume beginning; assume the return on PPF account to be 8%). (4 marks) a) 14,26,890 b) 20,81,345 c) 24,94570 d) 18,54,425 8. Mr. Ashay 35 years wants to retire at 60; he has a life expectancy of 75 years. Current expenses are Rs.300000 annually. He estimates no reduction of expenses post retirement. How much should he save per annum to achieve his target, if inflation is 6% and yield from investment is 10%. He does not wish to leave an estate. (4 marks) CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 114

a) Rs.139523 b) Rs.143789 c) Rs.153475 d) None 9. Mr. Manish is working with A ltd from October 1st 2005. He is entitled to a basic salary of Rs.6000per month. DA is 40% of basic salary. He retired on Jan 1st 2019. Benefits received Gratuity Rs.98000, Pension from Jan 1st ’19Rs.2000pm. Payment from recognized PF Rs.300000. Encashment of earned leave for 150 days Rs.36000. He was entitled to 40 days leave for every completed year of service. Got 50% of his pension commuted in lump sum w.e.f. March 1st ’19. What amount of leave encashment is eligible for tax exemption for Manish? (4 marks) a) Actual encashed b) Nil c) 10 months average salary d) None of the above 10. If nominal rate of interest is 12% and compounding is done monthly what would be the effective rate of return? (1 mark) a) 12.58% b) 12.61% c) 12.68% d) 12.75% 11. Nisha opened a PPF account on 1st April 2013. She had a balance of Rs.4,95,564 on 31st March 2016. The amount outstanding in her account at the end of preceding FY was Rs.6,45,293. What amount can she withdraw from PPF account and from which date? (2 mark) a) He cannot withdraw any amount from PPF account b) Rs.247,782 from 1st April 2019 in the year 2019-20 c) Rs.322,647 from 1st April 2017 in the year 2017-18 d) Rs.247,782 from 1st April 2016 in the year 2016-17 12. If a person wants a sum of Rs.42000/- pm at a replacement ratio of 70%, what should his normal earning be at the time of retirement?____ (3marks) a) 4.2 lakh CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 115

b) 5.6 lakhs c) 6.4 lakhs d) 7.2 lakhs 13. Jatin is 40 yrs. old. He earns Rs.2.8lakhs a year currently. If his earnings rise 8% for the next 15 years & he wants a replacement ratio of 80%, what will be his requirement at the time of retirement? (3 marks) a) 701555 b) 710566 c) 710655 d) 701655 14. The current income of a person is Rs.4lakhs p.a. He wants a sum of Rs.5lakhs at the replacement ratio of 80% in 5 years’ time. By what rate should his income increase to provide such a benefit? (3 marks) a) 7.33% b) 8.33% c) 9.33% d) 10.33% 15. Shinde invested Rs.72000 at the rate of interest of 5%. After 7 yrs. The ROI is 5%compounded half yearly. After 3 yrs. ROI is 6% compounded quarterly. What will he get after 15 years? (3 marks) a) 140000 b) 155000 c) 148251 d) 158242 16. Mira aged 30 saves Rs.15000 per year (at the end) in Bank FD earning 8.25% p.a. compounded annually until she retires at 58. Life expectancy is 80 yrs. Calculate the Corpus on the date of retirement? What amount she can withdraw at the beginning of each year inflation adjusted until 80 in case she wishes to exhaust her corpus completely? Inflation rate is 5% p.a. (4 marks) a) 1424894, 89458 b) 1348974, 87498 c) 1491655, 137767 d) 1491655, 91655.75 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 116

17. Mr. Goyal has just retired from Govt. Service with a lump sum of Rs.35,85,650 as retirement benefits in total. Currently he is 59 and life expectancy for him is 80 years. He intends to take a world trip soon, for which he would require an amount of Rs.4,00,000 and he also wants to buy a car of Rs.3 lakhs immediately. Calculate what amount will be available to him for post-retirement living expenses in the beginning of every month, considering inflation at 5.5% and rate of return is 8.5% p.a? (3 mark) a) 16337.5 b) 17000.5 c) 15133.5 d) 15535.6 18. What is the present value of an investment that will be worth Rs.10000 in 10 years based on an inflation rate of 4% p.a.? (2 mark) a) 3855 b) 5584 c) 6756 d) 8203 19. The current yield of a bond with coupon rate of 11.5% is 10.773%. How much is the price of this bond? (2 marks) a) 100 b) 106.75 c) 107.76 d) Nil 20. Aman 25 yrs old, working with a Pvt. Ltd Co. since 2017. He receives Rs.80,000/- towards leave encashment in 2020 which is equal to 1 mths salary. What is the taxable component? (2 marks) a) 4000 b) 12500 c) 20000 d) 80000 21. Jagan is 30 years of age and is currently earning Rs.350000 per annum. He expects an annual increment of 8% for the next 15 years and wants a replacement ratio of 75% at the time of retirement. According to you this amount will be ____? (2marks) a) Rs.832694 b) Rs.710566 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 117

c) Rs.823980 d) Rs.710655 22. Kulkarni has estimated present expenses of Rs.300000 per annum. If inflation is 6% for first 10 years, 5% for next 10 years and 7% for the balance term. What would if the household expenses required by him at the age of 60 years if he requires only 80% as replacement ratio. He is currently 30 years old and has a life expectancy of 75 years. (2 marks) a) 15.77 lakh b) 13.77 lakh c) 12.89 lakh d) None of the above 23. Sudarshan is retiring at 58 and has accumulated a corpus of Rs.25 lakh. If inflation is 5% and interest rate is 8% p.a. calculate the rate of growth. (2 marks) a) 3% b) 3.29% c) 2.86% d) 2% 24. If the inflation rate is 4.9% and the tax rate is 30%, evaluate the required rate of return to maintain the value of the investment? (1 mark) a) 8.33% b) 6.37% c) 7% d) 10% 25. The current yield of a bond, with coupon rate of 8.5% and market price of Rs.110 is ____ (2 marks) a) 7.143% b) 7.77% c) 7.27% d) 7.73% 26. The current yield of a bond with coupon rate of 9% is 12%. What is the worth of this bond? (3 marks) CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 118

a) 100 b) 75 c) 108 d) None of the above 27. Determine the present value of an investment that will be worth Rs.10000 in 8 years based on an inflation rate of 5%p.a.? (3 marks) a) 6768 b) 6756 c) 10000 d) Nil 28. Mr.Ankur aged 65 years just retired and has no source of income after retirement. He owns a self-occupied house which is valued at Rs.95 lakh. His financial planner has advised to take the benefit of reverse mortgage scheme. An approved lending institution agrees to provide periodic monthly payments under the scheme considering a loan to value ratio of 80% and at a rate of interest of 12.50% p.a. If the retiree opts for a 15-year term of reverse mortgage, what fixed periodic monthly payments he stands to receive under the scheme? (3 mark) a) 92,206 b) 93,671.67 c) 14355.48 d) 14505.01 29. A promises to pay B a sum of Rs.200000 at the end of 3 years and another Rs.400000 at the end of 5 years from now. What cash amount should be accepted now in lieu of the above two amounts if interest rate is 5% p.a.? (2 marks) a) 486178 b) 486523 c) 465789 d) None of the above 30. Reema aged 40 spends Rs.350000 p.a. as ALC. (Annual living costs).She expects her expenses to go up by 3% every year till her son settles in his career in 7 years’ time. After that her expenses will stabilize. Inflation rate is 6% p.a. Calculate the amount required by her at age: (2 marks)  47  60 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 119

a) 526270, 1122497 b) 639814, 1364677 c) 526270,1613441 d) None of the above 31. Neha has received an inheritance of Rs.2.5 lakh. She wants to withdraw equal amounts at the beginning of each month for the next seven years. She expects to earn an annual interest of 10% compounded monthly on her investments. What amount can she receive each month? (2 mark) a) Rs.4150 b) Rs.4116 c) Rs.2266 d) Rs.26265 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 120

SOLUTIONS 1. (c) 5.67 crores Solution: Current age of Raman 40 years Retirement age 62 years Annual family expenses Rs.7,00,000 p.a. Inflation during pre-retirement period 6% Expenses required on Retirement Rs.25,22,476 { FV of 7,00,000 @ 6% for 22 years Expected Return 7% Inflation post retirement 4% Expenses required for 35 years Corpus to be accumulated for retirement Rs.56715936 (rate 2.8846% (real rate), 35 N, -2522476 PMT, Bgn, Compute PV= 56715936 2. (a) Solution 240000 Pmt. Bgn 8=I 20=N Compute PV = 2544864 3. (b) Solution 40000 =Pmt Bgn 9.5 =I 20 =N Compute FV = Rs.23,70,554 4. (d) 1723047 (FV of Rs.4,00,000 @6% after 30 years is 2297396. But he requires only 75% of the last spend. 5. (c)Rs.27748 and Rs.2327568 (First compute EMI and then go to AMRT, PM 1=1, PM2=192, N=192, Rate = 8%/12, PV=-3000000, PMT= 27747.75, Sum INT Solve CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 121

6. (b) 140250 7. (c) Solution: Pmt = -30000, n=35, I =8%, mode = begin, FV = 5583064.439 Pmt = 300000, n =15, I =6%, mode = begin, PV = 3088495.176 5583064.439 – 3088495.176 = 2494569 8. (a) Solution: End/Begin 25 Step-1: Calculate the FV of expenses 6% Set 300000 N 0 I PV (solve) = 1287561.216 PMT 1 FV 1 P/Y C/Y Step-2:Calculate the corpus required Begin 15 (75-60) Set 3.77358% ((10-6)/1.06) N (Solve ) = -15093801.73 I -1287561.216 PV PMT 0 FV 1 P/Y 1 C/Y Step-3: Annual Savings needed to accumulate the required funds for retirement Set Begin N 25 (60-35) I 10% PV 0 PMT (solve) = 139522.5974 FV 15093801.73 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 122

P/Y 1 C/Y 1 9. (d)Solution: Least of 10 x 8400 =84000 Actual received = 36000 Statutory limit =300000 13 x 40 = 520days, actually taken 150 days, 520 – 150 = 370, As per act 13 x 30 = 390, therefore balance 390 – 370 = 20, 8400 x 20/30 =5600. 10. (c ) 11. (b) Rs.247,782 from 1st April 2019 in the year 2019-20 The Rule of Partial Withdrawal from PPF A/c:Anytime after the expiry of five years from the end of the financial year in which the initial subscription is made, the subscriber can partially withdraw but not more than fifty percent (50%) from the balance that stood to his / her credit at the end of the fourth financial year immediately preceding the year of withdrawal or at the end of the preceding financial year whichever is lower, less the loan amount (if any). Only one withdrawal is allowed per financial year. 12. (d) Solution 42000 x 12/ 70% = 7.2 lakhs 13. (b) Solution Mode = end, n = 15, I = 8%, PV = -280000, FV = 888207.3520, 80% x 888207.3520 = 710566 14. (c) Solution FV =500000/80% = 625000 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 123

Mode = end/begin, n = 5, PV = -400000, FV = 625000, I = 9.33% 15. (d) Solution: Mode = begin, PV = -72000, n = 7, I =5%, FV = 101311.2304, P/Y= 1, C/Y=1 After 7 years when investment is made for 3 years PV = -101311.2304, n = 3, I = 5%, FV (solve) = 117489.9671, P/Y= 1; C/Y=2 Amount accumulated at the end of 15 years, PV = -117489.9671, n = 5, I = 6%, FV (solve) = 158241.9504, P/Y= 1; C/Y=4 16. (d) Solution Mode = end, pmt = -15000, i= 8.25%, n =28, FV = 1491655, Mode = begin, n =22, I = 3.09..%, PV = -1491655, pmt = 91655.75 17. (c) Solution: Net retirement corpus available = Rs.28,85,650 RRR =2.84360{(8.5-5.5)/1.055} Monthly amount available for post-retirement living expenses Set Begin; N=252 {21(80-59)*12};I= 2.8436; PV=-28,85,650; PMT (solve) = 15133.57, P/Y=12; C/Y=1 18. (c) 19. (b) Solution 11.5 / 10.773 = 1.06748 X 100 = 106.75 20. (d) Leave encashment during service is fully taxable 21. (a) 22. (b) 13.77 lakh 23. (c)Real rate is to be calculated 24. (c) 7% Let us suppose the required rate of return is X% X * (1-0.30) = 4.9% Post tax return of 0.7% (1-0.30) should match the inflation (4.9%) to maintain the value of investment CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 124

X=4.9/0.7 = 7% Hence, the required rate of return to maintain the value of investment = 7% 25. (d) 26. (b) 27 (a) 28. Solution (c) Value of house = Rs.95 lakh Loan eligible = Rs.76,00,000 (95,00,000*.80) Rate of interest =12.50% N = 15 years Monthly payments under reverse mortgage = Rs.14355.48 (Set = begin, n=180 (15*12), i=12.50, PV = 0; FV=-76,00,000; PMT (solve)=14355.4754; P/Y=12; C/Y=12) Note: 1. Calculation: We generally see in mortgage formula, the loan amount is usually considered with negative sign in PV while FV is 'Nil'. In Reverse Mortgage case, the admissible loan amount is taken with negative sign under FV while PV is 'Nil'. Also, 'begin mode' is considered 2. The annuity period is 15 years. Though the annuity payment stops after 15 years, the loan is not payable as long as the mortgagor survives. After the death of the mortgagor and his/her surviving spouse, the lending institution sells the house and recovers loan amount with interest and the balance, if any is paid to the heirs. 29. (a) 30. (b) 31. (B) 4116 Set Begin, N= 84 (7*12), I=10, PV=250,000, PMT (solve) = 4115.99604, FV=0; P/Y=12, C/Y=12 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 125

SECTION–II 1. A person has availed a housing loan of Rs.28 lakh at 9.25% rate of return. Cost of the house is 40 lakhs. The tenure of loan is 18 years. He has present investments worth Rs.12 lakh. He will start saving Rs.50, 000 per quarter beginning a quarter from now. Investment will generate return of 9% p.a. What will be his net worth 5 years from now? Net worth does not include the house in which he lives. (3 marks) a) Rs.3.45 lakh b) Rs.13.56 lakh c) Rs.6.68 lakh d) Rs.7.45 lakh 2. Mr. X has taken a loan of Rs.3 lacs today at 11.25%p.a for a period of 60months from a nationalized bank. The first EMI’s will be payable end of every month. The bank has a prepayment penalty clause by which he can prepay the whole outstanding amount by paying a prepayment charge of 2.5%. He intends to prepay his loan after paying 36 installments and wants to know what amount he has to pay towards the foreclosure of this loan.(ignore taxes and any other charges, if applicable) (3 marks) a) Rs.149238 b) Rs.181105 c) Rs.154514 d) Rs.143913 3. Mr. Verma is 40 years old. Current household expenses are Rs.3,00,000 p.a. Inflation rate is 7% and increase in living standard will be at 1.75% up to retirement. Retirement age is 63 years and Life expectancy is 75 years. He starts investing Rs.30,000 p.a. increasing at the amount at a rate of 20% per year. Return on investments is 10% p.a. If after retirement, requirement is 80% of the last spend, what maximum inflation would sustain his corpus till he survives if corpus is invested at 7% p.a.? (4 marks) a) 1.86% b) 4.00% c) 6.07% d) 7.90% CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 126

4. Ms. Mamta is 30 and plans to retire at 58 years. Her CFP says that Mamta will require inflation adjusted Rs.75000 in the first month after retirement. Inflation is 4%p.a. & return on investment is 6%p.a. What is the retirement corpus required to meet such expense? Will Mamta’s corpus be enough to fund her retirement if she saves Rs.2lakhs p.a.(end of year)? Life expectancy 75 years. (4 marks) a) Yes, Rs.13,080,232 b) Yes, 13,705,622 c) Yes, Rs.17,48,948 d) No, Rs.15,78,498 5. Sudhakar decides to accumulate 50 lakhs when he retires. He is 30 years old and wants to retire at 55. Interest rate is 9% p.a. & inflation is 5% p.a. compounding to be done on annuity certain basis. If Sudhakar could save only Rs.45000 p.a for the first 10 years how much does he need to save for the next 15 years to meet his retirement nest egg? (3 marks) a) Rs.71,417p.a. b) Rs.85477p.a. c) Rs.98450 P.a. d) Rs.77,844 p.a. 6. Mr. Laxman, NRI working in USA for 5years. He is aged 40, and saving Rs.8lakhs at beginning of every year for the past 5 years and hopes to save for the next 10 years. He would like to return to India 10 years from now. Life expectancy is 70 years. If the estimated spend is Rs.90000pm. for the family. If inflation is 4% how long will his savings last? Investments earn 6% p.a.? (3 marks) a) The funds will last until Laxman is 81 years old. b) The funds will not be adequate to fund his estimated life span of 70 years. c) The funds will last until Laxman is 72 years old. d) The funds will exhaust before Laxman is 71 years old. 7. A 30 year old person plans to retire at age 50. He has Financial assets worth Rs.18 lakhs. His current expenses are Rs.27,000 p.m. Post retirement money is required for 30 years and provision to be made for purchase of inflation linked annuity. Average inflation is 7% and annuity is expected to yield 8% p.a. You advise him to invest his current financial assets at 9.5% p.a. If she CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 127

invests Rs.250000 per year at the beginning of the year, what return should be generated on his investment? (3 marks) a) 11.10% b) 19.65% c) 15.41% d) 12.61% 8. Mr. Swapnil will start receiving a pension of Rs.12000 pa., exactly 10 years from now. He will receive this pension for 20 years every year end. If interest rate is 12% what is the present worth of his pension? (3 marks) a) Rs.32323 b) Rs.28860 c) Rs.83667 d) Rs.32257 9. Ram aged 35 saves Rs.30000 per year (at the end) in Bank FD earning 7% p.a. compounded annually until he retires at 60. Life expectancy is 70 yrs. Corpus on the date of retirement? What is the fixed amount he can withdraw at the beginning of each yr. until 70. Presuming he wishes to leave his heirs an estate of Rs.150,000. Inflation rate is 5% p.a. (3 marks) a) 1897471, 197970 b) 2147854, 214598 c) 1745897, 192712 d) 1945875, 199145 10. Ms. Madhuriis 40 yrs old to retire at 65. Life expectancy is 75 yrs. She will require Rs.15000 in 1st month after retirement. Inflation 4% p.a., rate of return 7%. What is the corpus required to meet the expenses after retirement. Will the corpus be enough to fund her retirement if she saves up to Rs.30,000 pa (at the end of the year) (4 marks) a) 1562027, Yes b) 1687498,No c) 1984571, No b) 1568545.961,Yes CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 128

11. Niraj wants to retire at 45 and he wants to maintain his present standard of living. He spends 325000 a year. He is expected to live up to 85. Inflation 4% expected return 7% p.a. How can he achieve this? He is at present 30 yr. What is the nest egg required at age 45 and what amount shall he save every year to meet this plan? His present investment is Rs.10, 00,000. (4 marks) a) Nest egg and saving required will be 25100065 and 541093 resp. b) Nest egg and saving required will be 12773065 and 438300 resp. c) Nest egg and saving required will be 14182819.48 and 424864.82 resp. d) Nest egg and saving required will be 14773065 and 740530 resp 12. Your client Kalpesh’s current monthly expenditure is Rs.25,000. He is 35 years old and expects to retire at the age of 55. His annual expenses are estimated to rise by 5% p.a. and his life expectancy is 75 years. He wishes to maintain the same standard of living after retirement. The rate of return expected on investments before retirement is 10% p.a. and after retirement is 8% p.a. How much does he need to save every month in order to maintain the same standard of living after retirement? (4 marks) a) 16830.64 b) 16964.86 c) 66332 d) 16046.44 13. Mr. X purchased a flat worth Rs.50 lakh in February 2007 by availing a housing loan of Rs.35 lakh for 15 years tenure at a rate of 9% p.a. The value of this flat as on Feb 2013 has appreciated to Rs.90 lakh. What approximate value of home equity can he consider in his flat towards his unencumbered interest after also setting aside 15% of the appreciation value towards taxes and other costs to be discharged on selling the unit? (4 marks) a) Rs.52 lakh b) Rs.75 lakh c) Rs.57.79 lakh d) Rs.67.79 lakh 14. Krishna aged 30 saves Rs.10000 per year (at the end) in Bank FD earning 8% p.a. comp annually until he retires at 60. Life expectancy is 80 yrs. Corpus on the date of retirement? What amount he can withdraw in the beginning of each year inflation adjusted until 80. Presuming he wishes to leave his heirs an estate of Rs.200,000. Inflation rate is constant at 6% pa. (4 marks) a) 1105694, 61375 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 129

b) 1132832, 12787 c) 1054875, 108423 d) 1132832, 64709 15. Deepak invested Rs.40,00,000 in a 25-year fixed monthly annuity providing a yield of 9.5%. If the start date of the monthly annuity is deferred by 5 years, calculate the amount of monthly annuity? a) 55016.285 b) 52916.54 c) 54584.16065 d) 52532.33 16. Harinder has heard that changes in inflation rate might have a significant impact on his real saving. Currently he can buy the car of his dreams for Rs.3 Lakh. He wants to estimate the amount he may need to buy the car in 8 yrs time. The inflation rate for the period are expected to be 5% p.a. for 1st four year, 4% p.a. for next four years value of the car is expected to fall by 10 %every4 yrs. If he buys the car in 8 yrs then what would be the same real amount that he would need to have saved. (4 marks) a) 345539 b) 400000 c) 383932 d) 426591 17. You have been appointed as financial planner of Mr. Ranjit. He is 35 yrs old at present and would be retiring at age 60 yrs. He expects to live up to 80 yrs. You have to plan in such a way that Ranjit starts getting 25000 pm from the very day he retires and keep receiving till his survival. If an expected returnis 7%p.a, what is saving required per year to meet his retirement needs? (4 marks) a) 47646, b) 50982, c) 47924, d) 48723.96 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 130

18. Mr. Sunil’s present age 25 yrs, wants to retire at 55 yrs. Life expectancy is 70 yrs. He estimates that he will require 35000 pm after retirement. Inflation is 4.5% and return on investment is 6.5%.What will be saving required per annum? (4 marks) a) 63534.35 b) 59656.67 c) 63358, d) 82689, 19. Mr. Bhandari presently 30 yrs old, wants to retire at 45 yrs. He wants to maintain present standard of leaving .He is currently spends around Rs.3,25,000 p.a. He expects to survive upto 85 yrs .Inflation is 4% and expected return on investments are 7%. What will be nest egg required at age 45 yrs? What amount, he needs to save every year to meet his plan of retirement. His present savings are around 10 lacs. (4 marks) a) 14182819.49, 454605.35 b) 12773065, 438300 c) 14182819.49, 424864.82 b) 14773065, 740530 20. Amar is 30 years old wants to retire at 45 years. He deposits 25000 p.a. at the year-end for 15 years, earning an interest rate of 5%. He wants 75000 p.a. post retirement. How long will his corpus suffice him? (2 marks) a) 8 years b) 9 years c) 8.59years d) 7 years 21. Ritesh who is 32 years old spends annually Rs.8.5 lakh towards his household expenses. He expects to retire at 55 years. During this period inflation is expected to be on an average 6% p.a. He wants to cover 30 years’ living expenses for self and spouse. If the inflation in the post- retirement period moderates to an average of 5% p.a. and he expects to generate a return of 8% from his accumulated corpus, what corpus should he accumulate for a comfortable retirement? a) 5.67 crore b) 6.67 crore CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 131

c) 6.48 crore d) 5.90 crore 22. Sundar is a 30 year-old self-employed youth with a life expectancy of 75 years. He has been saving Rs.30,000 per year providing a compounded return of 8% p.a. for last 5 years. Sundarwants to retire after total 25 years of saving. His post retirement funds are expected to earn 6% pa returns and expenses after retirement are fixed at Rs.3 lakh per year. He wants to know what rate of return should he get on his current accumulated fund as well as his future yearly saving of Rs.30,000 pa till retirement. To fund his retirement needs and leaving Nil estate behind. (Assumption: All computations for interest spend and savings compound annually, assuming beginning of the period investment). a) 11.72% b) 11.69% c) 10.61% d) 13.20% 23. You advise your client aged 31 years to accumulate corpus for retirement. The client already has in Balanced MF scheme Rs.1.60 lakh which you advise to extend to achieve this goal. You advise him to start SIP of Rs.15,000 per month till his age of 56 years. You advise him to switch outstanding Balanced MF portfolio to Liquid schemes from age 57 until retirement at age 60. How much of the retirement corpus would he be able to accumulate?(Rate of return Balanced MF 9% p.a., Liquid MF 5.5% p.a.) a) 2,22,18,594.65 b) 1,73,59,320 c) 10,001,947 d) 1,89,21,658.80 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 132

SOLUTIONS 1. (c) Solutions: Rs.6.68 lakh Housing loan liability 28,00,000 Tenure18 years Rate of interest 9.25% Financial assets 12,00,000 Annual Savings 2,00,000 Rate of investment growth in assets 9% EMI on housing loan 26,659 (Set End; N=18*12; I= 9.25%; PV -28, 00,000, P/Y =c/Y=12, PMT = Solve) After 5 years Outstanding loan amount 24,14,624 (Amortization: PM1 = 1, PM2 =60, N= 13*12, Rate=9.25%/12, PV=-2800000, PMT 26659.33, Balance Solve (-2414624) Financial Assets30,82,962(Go to CMPD, Set END, N=5*4, I= 9, PV= -12,00,000,PMT= -50000; P/Y=4, C/Y=1, FV Solve Rs.3082962) Net Worth of the individual after 5 years 668338 (3082962-2414624) 2. (d) Rs.143913 (First compute EMI, Go to AMRT, PM1= 1, PM2=36, N=60, Rate=.9375, PV=- 300000, PMT=6560.19, Bal Solve= Rs.140403.08 Add 2,5% penalty to it to foreclose the loan) 3. (c) 6.07% Solution: Present age 40 years Retirement Age 63 years Post Retirement survival period 12 years (75 – 63) Corpus accumulated on Retirement 18906713 Growing annuity with PMT of Rs.33000 (30000*1.10) Rate on investment= 10%, Growth rate is 20%. Number of years 23)(30000*(1+10%)*((1+10%)^(63-40)-(1+20%)^(63-40))/(10%-20%)) Current expenses 3, 00,000 Inflation 8.75% CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 133

Expenses on retirement 20,65,353 (Set End, i=8.75%, n=23 (63-40), PV=3,00,000, FV=solve, P/Y=C/Y=1) 80% of last spend 16,52,283 (80% of 20,65,353) Expected (real) rate of return for inflation-linked annuity = 0.88% (Set = begin, n=12, PMT= - 1652283, PV=18906713, I =solve)) Returns from corpus post-retirement 7.00% p.a. Maximum Inflation for a 12 years' inflation-linked annuity 6.07% p.a. (1+7%)/(1+0.88%)-1 4. (a) Solution: Current Age 30 years Retirement Age 58 years Life expectancy 75 years Post Retirement Period 17 years Expenses in the first month of 75,000 retirement Inflation 4% Investment return 6% Real Rate of return 1.9230769% (6%-4%)/1.04= 1.9230769 Corpus required 13,080,231.62 Set Begin; N= 204 (17 * 12); I=1.9230769; PV = Solve; PMT = -75,000; P/Y= 12 C/Y=1; PV = Solve Funds that can be 13,705,622.32 Set End ; N=28, I=6%;PMT = -2,00,000; accumulated on saving Rs.2,00,000 p.a. 5. (a) Solution Page 134 Step-1: Calculate the amount accumulated by saving Rs.45,000 p.a. for 10 years Set Begin N 10 I9 PV 0 PMT -45000 CFP Level 2 - Module 1 – Retirement Planning - Workbook

FV (solve) 745,213 P/Y 1 C/Y 1 Set Begin N 15 I 9 PV PMT (solve) -745,213 FV -71416.60 P/Y 50,00,000 C/Y 1 1 6. (c) Solution Step-1: Amount accumulated by saving Rs.8,00,000 Set Begin N 15 I 6% PMT -800,000 FV (SOLVE) 19738022.46 Step 1 Amount accumulated by saving Rs.8,00,000 Set Begin N 269.3 I (6%-4%)/1.04 =1.923076923 P/Y 12 PMT -90000 PV -19738022 Time the corpus will last is = 269.3 months= 22.44 years Amount needed starting from age = 50 years CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 135

Corpus will last until = 50 +22.44 = 72.44 years 7. (d) 12.61% Solution : Current age= 30, Retirement age = 50, Retirement period =30 years. Current expenses= Rs.27000 p.m. or Rs.324000 p.a. Annuity rate expected is 8%, Inflation is 7%, FV of present expenses= PV=- 27000, N= 20, Rate=7% FV=104481 Corpus required >Pmt= 104481, Begin, Real Rate= .93% N=30 *12, p/y =12 Compute PV=32833476 Current investments Rs.18,00,000 invested at 9.5% will become Rs.11054902 in 20 years Balance corpus to be accumulated is Rs.21778574(32833476-11054902) (FV =21778574, N= 20, Begin mode, -250000 Pmt , Compute Rate= 12.61% 8. (b)Solution Mode = end, I = 12%, n = 20, pmt = 12000, PV = 89633, Mode = end, I =12%, n = 10, FV = 89633, pv= 28859.5 9. (a) Solution: set = end, n = 25 (60-35), I = 7%, PMT= -30,000; FV = 1897471, First we need to discount + 1,50,000 for 10 yrs. @ 7% p.a. As inflation is constant at 5% during pre and post retirement phase, calculate real rate of return ( ) , RRR = (7-5)/1.05 =2/1.05 =1.90476% Set: Begin; n=10 (70-60), I = 1.90476; PV = (-1897471 – 76252), PMT = 197970. 10. (d) Solution: Calculate the retirement corpus accumulated by saving Rs.30,000 p.a. (end of year) Set = End; N= 25; I =7%; PMT = -30,000; FV (solve) = 1897471.131; P/Y=C/Y=1 Calculate the retirement corpus required Set = begin; N=10*12; I=2.8846 {7-4)/1.04}; PMT= 15000; PV (Solve)=1568545.961 P/Y=12; C/Y=1 11. (c) Solution: Step-1: Calculate the inflation adjusted expenses at retirement (age 45) Set Begin; N=15; I =4%; PV=-325000, FV (solve) = 585306.64 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 136

Step-2: Calculate the amount of retirement corpus (nest egg) required Set Begin; N= 40 (85-45); I= 2.8846 {7-4)/1.04}; PMT = -585306.64;PV (solve) = 14182819.48 Step-3: Calculate the amount of savings required per year Set begin; N= 15 (45-30); I= 7%; PV= -10,00,000; FV = 14182819.48; PMT(Solve) = 424,864.82 12. (a)Solution: Step-1: Calculate the inflation adjusted expenses at retirement Set Begin; N=20; I=5%; PV=25,000; FV (solve) = 66332.44263 Step-2: Calculate the retirement corpus required Set = Begin; N=240 (75-55)*12; I=2.85714 {(8-5)/1.05}; PMT= 66332.44263; PV(solve)= 12185166.66 ; P/Y=12; C/Y=1 Step-3: Calculate the amount of monthly savings required per year to build the retirement corpus Set=Begin; N=240 (55-35)*12; I=10; FV=12185166.66; PMT (solve)= 16830.65; P/Y=12 C/Y=1 Monthly savings required to build corpus = 16830.65 13. (c)Rs.57.79 lakh Solution: EMI on housing loan Rs.35499 (Set End; N=180 (15*12); I=9%-PV= 35,00,000, PMT(solve)=35499; P/Y=C/Y=12) Installments paid till Feb 2013 Outstanding loan amount till Feb 2013 Rs.2621249 (Go to Amortization (AMRT), PM1=1, PM2=72, N=180, I=.75%, PV=-3500000, PMT=35499.33, Bal Solve=2621249) Current Value of the flat Rs.90,00,000 Appreciation Value of the flat Rs.40,00,000 Amount towards taxes Rs.600000(15% of Rs.40 lakh) Home equity in the flat Rs.5778751 (9000000-2621249-600000) 14. (d) Solution: Mode = end, n = 30, I =8%, pmt = -10000, FV = 1132832. We need to calculate the Pv of state () Mode = begin, n =20, I = 1.88%, PV = -(1132832-42910), Pmt = 64709 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 137

15. (b) Solution Amount of investment = 40,00,000 Interest rate = 9.5% Deferment period = 5 years Amount available at the time of the start of annuity = 6296954.96 (set begin/end; n=5, I=9.5%; PV = 40,00,000; FV (solve) = 6296954.964; P/Y=C/Y=1) Period of monthly annuity =300 months (25*12) Amount of monthly annuity =(set begin; N=300; I=9.5, PV= 62,96,954.964; PMT (solve) = 52916.546; P/Y=12, C/Y=1) 16. (a) Solution: Mode = end, PV = -300000, n = 4, I = 5%, Fv = 364651.8750 PV = - 364651.8750 x 0.90, n = 4, I = 4%, FV = 383932, Amount needed as value of car will reduce by 10% = 345539 17. (d) Solution Mode begin, n = 20 x 12, I = 7%, pmt = -25000, PV (solve) = 32,97,465.633; P/Y =12; C/Y=1 Mode = begin, n = 25, I = 7%, FV = 3243372.611, pmt (solve) = 48723.96; P/Y=C/Y=1 18. (b) Solution: Step-1: Calculate the amount of retirement corpus required Set Begin; N= 180 (70-55)*12; I= 1.91387 {(6.5-4.5)/1.045; PMT =-35000; PV (solve)=5487771.318; P/Y=12; C/Y=1 Step-2: Calculate the amount of savings required to build that corpus Set = Begin; N=30 (55-25); i= 6.5%; FV=5487771.318; P/Y=C/Y=1; PMT (solve) = 59656.67 19. (c) Solution: Step-1: Calculate the inflation adjusted expenses at retirement Set Begin, n= 15 (45-30), I= 4%, PV=-3,25,000, FV(Solve)=585,306.64; P/Y=C/Y=1 Step-2: Calculate the retirement corpus required (nest egg required at age 45) Set Begin, n= 40 (85-45), i=2.8846{(7-4)/1.04}; PMT = 585,306.64, PV (solve) =14182819.49; P/Y=C/Y=1) Step-3: Calculate the amount of savings required per year Set Begin, n=15 (45-30), i=7%, PV=-10,00,000, FV=14182819.49, P/Y=C/Y=1; PMT(solve)=424864.82 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 138

20. (c)Mode = end, n = 15, pmt = -25000, FV = 539464.09 Mode = begining, I = 5%, pmt = 75000, PV = -539464.09, N =8.59 years 21. Solution (B) Step 1: Calculate the amount of inflation adjusted expenses during retirement Current household expenses = Rs.8.5 lakh Inflation in pre-retirement period = 6% Inflation adjusted expenses expected on retirement =32,46,787.212 (set Begin, n= 23 (55-32), i=6%; PV=8.5 lakh, FV(solve) = 32,46,787.212 ;P/Y=C/Y=1) Step 2: Calculate the amount of retirement corpus required Real Rate of Return = 2.8571 {(8-5)/1.05} Retirement corpus required = 6.67 crore (Set Begin, n= 30; i= 2.8571 {(8-5)/1.05}, PMT = 32,46,787.212; PV(Solve) = 666,82,152.88; P/Y=C/Y=1) 22. Solution (b) Pre-retirement investment rate = 8% Post retirement investment rate = 6% Fixed expenses during retirement = Rs.3,00,000 Retirement Age = 50 years [he wants to retire after 25 years of saving and he has been saving since last 5 years, he is current 30 years, so retirement age =50 (30+20)] Retirement corpus required = Rs.40,65,107.25 Set Begin; N= 25 (75-50), i=6%, PMT = 3,00,000; FV=0 (he doesn’t want to leave any estate); PV (solve) = -40,65,107.25; P/Y=C/Y=1 Amount accumulated by saving Rs.30,000 p.a. for last 5 years = {Set Begin; N=5, I=8; PMT=30000; FV(solve)= 190077.8711; P/y=C/y=1} Rate of return required: Set – Begin, n = 20, Pv = -190077.8711, Pmt = - 30000 Fv = 4065107.25, I = Solve = 11.69% CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 139

23. Solution (a) Step 1 Calculate the amount of corpus accumulated at the end of age 56. Amount currently accumulated in balanced MF scheme = Rs.1,60,000 Rate of return on balanced MF scheme = 9% Accumulated amount in balanced MF scheme at the end of age 56 =1,73,59,320 Set Begin; N= 300 (56-31)*12; I = 9; PV = 1,60,000; PMT =15,000; FV(Solve)= 1,73,59,320; P/Y=12; C/Y=1 Balance at the end of age 57 (amount to be switched to Liquid Fund) =1,89,21,658 (17359320 *1.09) Amount accumulated at the end of age 60 years in Liquid scheme = 2,22,18,594.65 Set Begin; N=3, i=5.5; PV=1,89,21,658; FV(solve) =2,22,18,594.65 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 140

SECTION–III 1. Navneet is 42 years old, earns and spends Rs.8,50,000 annually to maintain his family. He expects his expenses to rise by 8% every year. He has not saved anything for his retirement so far. He has a second house which will start generating rental income of Rs.2,60,000 p.a. immediately. The rental income also increases by 8% every year. If he starts investing annual rental income in an investment yielding 10% p.a. at the end of every year, how many years do you think his corpus will last taking the received rents post retirement in to account? He retires at age 60. (4 marks) a) Over 4 years b) Over 9 years c) Over 8 years d) Over 3 years 2. Manoj 30 yrs employee earning salary of Rs.300000. He started saving 10 % of his salary, at the end of the year, in a saving plan which yields 6% interest p.a. His salary increases by 5% pa. If Manoj intends to prep one his retirement to the age of 55 yrs. and needs to have the same amount of accumulated saving as at the age of 60 yrs. What percentage of his salary should he start saving to achieve his goal? (4 marks) a) 14.04% b) 3.56% c) 15.70% d) 6.70% 3. Mr. Sharma invested annually Rs.2,00,000 towards his retirement in an aggressive fund from his age 40 onwards. After initial high returns, the fund could generate return of just 3.5% p.a. in 10 years. He can direct a higher amount towards retirement goal in the remaining 10 years of retirement. You advise him to switch half of the accumulated funds along with yearly investment in a debt fund with indicative return of 8% p.a. in the future. To achieve a target corpus of Rs.1.2 crore. What revised amount should be invested every year if the future expectation from aggressive fund is 11% p.a.? (4 marks) a) Rs.5.00 lakh b) Rs.4.87 lakh c) Rs.1.06 lakh d) Rs.3.79 lakh CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 141

4. An annuity product is designed in such a way that it gives first cash flow at 8% of the corpus at the end of first year and thereafter every year in the form of growing annuity at the rate of 5%. If the cash flows are guaranteed for 15 years, what rate of return is obtained on the corpus invested? a) 6.80% b) 6.41% c) 5.07% d) 5.80% 5. Mr. Thapar has just retired and has accumulated Rs.1.65 crore as retirement corpus. His current monthly expenses are Rs.85,000 which he needs inflation adjusted for 25 years. If he considers average inflation to be 5% p.a. from now onwards, what rate of return from a 25 year annuity, payable annually and deferred by one year, should meet his goal? a) 3.67% b) 8.67% c) 9.76% d) 8.86% 6. A retired couple has fixed pension of Rs.35,000 and their current living expenses are Rs.45,000 p.m. They do not have any other source of income. They have consulted you (financial planner) and you advise them to avail a loan under reverse mortgage which is an eligible lump sum of Rs.50 lakh for 15 years at 12.5% p.a. interest. The annual interest is calculated after every 12 months on the pre-standing balance and added to the outstanding loan amount. You invest the available amount after withholding the excess normal expenses for the first year and considering 6% inflation thereafter at the beginning of every year. If the investment yield is 9% p.a., by what amount outstanding loan would exceed investment after 8 years. a) 56.40 lakhs b) 53.25 lakhs c) 33.54 lakhs d) 71.88 lakhs 7. Mr. Gupta purchased a 25-year immediate annuity plan which provides an annual stream of income, increasing year-on-year at 5%. He is due to receive 5th installment of Rs.4.50 lakh which is 6% of the balance corpus remaining in annuity. He wants the term of the annuity to increase. He estimates that Rs.3.75 lakh would be sufficient for his current living expenses. He proposes this to the annuity provider with other terms remaining as originally agreed. If the yield of the CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 142

annuity is 7.5% p.a., how many more installments would get added in the restructured annuity than the original? a) 3.59 installments b) 6.36 installments c) 5.59 installments d) 7.39 installments 8. Mr. Ahuja just retired has accumulated Rs.55 lakh. He invests this corpus in an investment instrument giving return of 8% p.a. His current annual household expenses are Rs.6.5 lakh, escalating at inflation of 6% p.a. He would rent out his other fixed property at an expected annual rent of Rs.2.20 lakh, the rentals increasing at 6% p.a. The balance expenses are met by withdrawing from the invested corpus. The commercial property, currently valued at Rs.60 lakh, is expected to appreciate at 8% p.a. He expects to sell the property after 15 years to create a fresh corpus for his living expenses. How long the total funds available are expected to last after 15 years? a) 16 years 8 months b) 16 years 1 month c) 15 years 2months d) 15 years 8 months 9. Rohit, aged 29 years, have contacted you for planning his retirement. His monthly household expenses are Rs.40,000 p.m. Rohit wishes to retire at his age 58 and sustain 70% of pre- retirement household expenses, inflation adjusted, till his lifetime of 75 years. He has two children for whom he wishes to have a provision of gifting Rs.50 lakh per child and an additional Rs.25 lakh towards charity to an Old Age Home at Rohit’s age of 70 years. The sums are at absolute values then. He also wish to provide in the corpus an additional Rs.10,000 per month (current costs) towards healthcare after Rohit’s age of 70 years. You estimate the required corpus, considering the same shall be invested in investment yielding 7% p.a., to be _________(consider inflation at 5.5% p.a.). a) 3.19 crore b) 4.03 crore c) 2.90 crore d) 5.12 crore CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 143

10. Ms. Bhawna, aged 34 years, has plans to retire early from service at her age of 55 years. Her current household expenses are Rs.70,000 p.m. Her retirement corpus has been estimated considering her current living expenses, her life expectancy as 85 years, investment rate of 7% p.a., inflation at 5.5%p.a. pre-retirement and an average inflation of 5% p.a post retirement. How much curtailment of expenses in the first year of retirement is needed, if provision is made for 5 more years of expected life and investment rate of return is considered to be 6%? a) 23% curtailment b) 12% curtailment c) 14% curtailment d) 10% curtailment 11. A retiree of age 60 wants to enter into the reverse mortgage scheme by mortgaging his self- occupied house which is valued at Rs.80 lakh. An approved lending institution agrees to provide periodic monthly payments under the scheme considering a loan to value ratio of 80% and at a rate of interest of 13.75% p.a. If the retiree opts for a 15- year term of reverse mortgage, what fixed periodic monthly payments he stands to receive under the scheme? a) Rs.13,379 b) Rs.10,703 c) Rs.10,826 d) Rs.13,532 12. A retiree of age 65 has fixed pension of Rs.15,000 per month. His household expenses have exceeded his pension of late and are Rs.16,000 per month now. He has approached an approved lending institution under Reverse Mortgage Scheme. He is offered fixed monthly payments for 15 years at a rate of interest of 13.75% on Rs.64 lakh eligible value of his home. He meets his annual expenses as increased by 6% inflation every year and invests the excess amount from his two fixed annuities, fixed pension and reverse mortgage stream, in an investment yielding 10% p.a. at the end of every year starting from this year onwards. You assess at the end of five years thus accumulated fund against the total liability under Reverse Mortgage and find that ______. a) Rs.3.34 lakh net liability due to Reverse Mortgage Loan b) Rs.3.10 lakh net liability due to Reverse Mortgage Loan c) Rs.3.51 lakh net liability due to Reverse Mortgage Loan d) Rs.66,097 net liability due to Reverse Mortgage Loan CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 144

13. An annuity product AA at Rs.8640 per annum per Rs.1.00 lakh of purchase value offers annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant. Another annuity product BB at Rs.7010 per annum per Rs.1.00 lakh of purchase value (with return of purchase price), offers annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of last survivor. Today your client and his spouse have respectively 20 and 25 years more expected life. You estimated returns from product AA & BB product, to arrive at a right selection for your client. a) BB; it offers 48 basis points/ annum better than AA b) AA; it excess cash flow invested at conservative 8% p.a. c) AA; if offers 41 basis points/ annum better than BB d) BB; it offers 84 basis points/ annum better than AA 14. Sundar is a 30 year-old self-employed youth with a life expectancy of 75 years. He has been saving Rs.30,000 per year providing a compounded return of 8% p.a. for last 5 years. Sundar wants to retire after total 25 years of saving. His post retirement funds are expected to earn 6% pa returns and expenses after retirement are fixed at Rs.3 lakh per year. He wants to know what rate of return should he get on his current accumulated fund as well as his future yearly saving of Rs.30,000 pa till retirement to fund his retirement needs and leaving Nil estate behind. (Assumption: All computations for interest spend and savings compound annually, assuming beginning of the period investment). Interest rate : equity MF 14% p.a. Debit MF=9% p.a. risk free 7.5% p.a. a) 11.72% b) 11.69% c) 10.61% d) 13.20% CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 145

SOLUTIONS 1. (b) 9 years. Solution: Current expenses 850000 Rate of increase of expenses 8% Rent received from renting 260000 second house Rate of increase of rent 8% Investment yield from investing 10% rent Accumulated value of investment 20330671.59 FV of Rs.260000 with growing annuity at age 60 formula} =260000*(((1.1)^18-(1.08)^18))/2% Expenses required at age 60 (3,396,616.57) Set Begin, N= 18, I=8%,PV=850000, FV(Solve) Expenses covered by rent (1,038,965.07) Set Begin, N= 18, I=8%,PV=260000, received at age 60 FV(Solve) Balance expenses to be drawn (2,357,651.50) = 3,396,616.57- 1,038,965.07 from corpus Number of years the corpus 9.293919418 Set Begin, n=solve, would last i=RRR (10-8)/1.08)=1.8519%; PMT=(-)2,357,651.50; PV=20330671.59 2. (c) Solution: = 30000 x [(1.06)^30 – (1.05)^30] / (0.06 -0.05) = 4264646.395 4264646.395 = x [(1.06)^25 – (1.05)^25]/ (0.06 – 0.05) =47096.32336 47096.32336 / 300000 = 15.698% Solution: (B) CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 146

3. (d) Solution: Accumulated value of investments Rs.2428398 (FV of 2,00,000 PMT, @3.5% for 10 years at the beginning of the year) Initial Corpus shifted from aggressive fund in debt fund Rs.1214199 Remaining corpus in aggressive fund Rs.1214199 Accumulated corpus in aggressive fund Rs.3447623(FV of 1214199 @11% for 10 years) Total targeted corpus Rs.12000000 Remaining to be accumulated through debt funds Rs.8552377 (12000000-3447623) We need to compute PMT (FV=8552377, Rate=8%, N=10, Bgn Mode, PV=-1214199 Compute PMT=379087) 4. (a) Suppose the corpus invested = Rs.100 Cash flow at the end of first year = 8% Annuity is growing at the rate of 5% every year Guaranteed period of annuity = 15 years Corpus invested= 100 Using Cash Editor Function 1 -100 9 11.2568 28 10 11.81964 3 8.4 11 12.41063 4 8.82 12 13.03116 5 9.261 13 13.68271 6 9.72405 14 14.36685 7 10.21025 15 15.08519 8 10.72077 16 15.83945 IRR (solve) = 6.8034% CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 147

5. (d) Amount of annual current expenses = Rs.10,20,000 Rate of return from annuity =3.67292117 (Set= end, n=25; PMT= -10,20,000; PV = 1,65,00,000; FV=0; P/Y=C/Y=1) here we have taken set as end as it is mentioned in the question that annuity is deferred by one year. Rate of 25 years level annuity of which level payment pre-5% growth is Rs.1,020,000. Then, Annual Growth of 5% built into this annuity to make it growing annuity of which first payment is Rs.1,020,000. So, real rate of return (RRR) = 3.67292117% (inflation adjusted return) The formula for RRR = [ To calculate the nominal rate = {(1+RRR) * (1+inflation rate)}-1 = (1.03673 * 1.05 )-1 = 8.8567% 6. Solution: (a) Current annual living expenses = 45,000 * 12 = 5,40,000 Step-1: PV of 6% of escalated expenses discounted at 9% for 8 years = Rs.39,25,989.40 (set begin, n=8, i= 2.830188679 (9-6)/1.06, PMT=-540,000; PV (solve) = 39,25,989.40; P/Y=C/Y=1) Annual pension = 35000*12 = 420,000 Step-2: PV of fixed pension discounted at 9% for 8 years = Rs.25,33,840.191(set begin, n=8, i= 9, PMT=-420,000; PV (solve) = 25,33,840.191; P/Y=C/Y=1) Step-3: PV of additional expenses recovered from RM loan disbursed =Step 1 – Step 2 = 39,25,989.40 - 25,33,840.191= 13,92,149.209 Loan eligible under reverse mortgage = 50,00,000 Step-4: Balance loan amount to be invested for 8 years at 9% p.a.= 50,00,000 - 13,92,149.209(Step 3) =36,07,850.79 Step-5: Accumulated value after 8 years = 7188868.701(Set begin, n=8, i=9, PV= -36,07,850.79; FV (solve) =7188868.701; P/Y=C/Y=1) Since the annual interest is calculated after every 12 months on the pre-standing balance and added to the outstanding loan amount, Step-6: The outstanding loan amount at the end of 8 years = 1,28,28,922.57(Set end, n=8, i=12.50%; PV=-50,00,000; FV(solve)=1,28,28,922.57; P/Y=C/Y=1) CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 148

Step-7: Difference between loan liability and investment =Step 6 – Step 5 = =1,28,28,922.57- 7188868.701 =56,40,053.869 7. (c) 5.59 installments 5th cash flow stream due to receive = Rs.4,50,000 (which is 6% of balance amount) Balance corpus remaining in annuity =Rs.75,00,000 (450,000/6%) Revised withdrawal amount of 5thinstallment = Rs.3,75,000 Interest rate = 7.5% Growth in annuity as agreed = 5% Outstanding corpus after paying 5thinstallment (out of 25) = 75,00,000 – 3,75,000 = 71,25,000 Real rate of return = (7.5-5)/1.05 = 2.38095 Number of years the corpus to last beginning 6thinstallment =25.59(set begin; i=2.38095; PV=- 71,25,000*1.075; PMT=3,75,000*1.05; P/Y=C/Y=1; N(solve)=25.59) Total installments including already 5 paid = 25.59+5 = 30.59 Increase in installments = 5.59 installments(30.59-25) 8. Solution: (d) 15 years 8 months Step-1: PV of 6% increasing expenses for 15 years at 8% interest rate = 7946409.548 (set end, n=15, i=1.8867924 {(8-6)/1.06}; PMT =-613207.5472 (-6,50,000/1.06); P/Y=C/Y=1; PV(Solve) = 7946409.548) Step-2: PV of 6% increasing rental for 15 years at 8% discount rate = 2689554.001 (set end, n=15, i=1.8867924 {(8-6)/1.06}; PMT =-207547.17 (-2,20,000/1.06); P/Y=C/Y=1; PV(Solve) = 26,89,554.001) Drawn from corpus in 15 years = 7946409.548 (step 1) - 26,89,554.001(step 2) = 52,56,855.547 PV of balance corpus (on investing) = 55,00,000 – 52,56,855.547 = 243,144.453 Accumulated investment after 15 years = 7,71,295.3241(set end, n=15, i=8%, PV=243144.453, FV(solve)=; P/Y=C/Y=1)-------------------------------------------(A) Value of commercial property now = 60,00,000 Valuation of commercial property after 15 years = 1,90,33,014.6(set end, n=15, i=8%, PV=60,00,000, FV(solve)=; P/Y=C/Y=1)--------------------------- (B) Total fresh (revised)corpus after 15 years =(A) + (B) =771295.3241 + 19033014.60 = 19804309.92 Expenses (inflation adjusted) required after 15 years = (set end, n=15, i=6%, PV=-6,50,000; FV(solve)= 1557762.826 ; P/Y=C/Y=1) CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 149

Period up to which the revised corpus would last = 15.6957 (15 years 8 months) (set end; i=1.8867924 {(8-6)/1.06}; PMT= 14,69,587.572 (1557762.826/1.06); PV(Solve)= 19804309.92; P/Y=C/Y=1; N(SOLVE) = 15.6957) Period upto which the revised corpus would last = 15 years 8 months 9. (a)3.19 crore Current age of Rohit = 29 years Retirement age of Rohit = 58 years Pre- retirement period = 58-29 = 29 years Post retirement period (considering Rohit’s Life expectancy) = 75-58 = 17 years Current monthly household expenses (in today’s value) =40,000 p.m. Monthly Household expenses (inflation adjusted) on retirement (at Rohit’s age 58) = 132275.48(set begin, n=29, i=5.5, Pv=28000 (40,000 *70%), FV(solve) =132275.48; P/Y=C/Y=1) Real rate of return = (7-5.5)/1.055 = 1.42180 Retirement corpus required to provide for expenses (till age 75) =24004385.80(set begin, n=204 (17*12), i=1.42180, PMT= 132275.48;PV(solve) =24004385.80; P/Y=12; C/Y=1)………….Corpus (1) Corpus required to provide for gifting and old age home charity =55,50,149.491(set begin, n= 12 (70-58), i=7, FV=1,25,00,000(50L+50L+25L); P/Y=C/Y=1; PV (solve) = 5550149.491)…………………………Corpus (2) Inflation adjusted health care expenses at age 70 = 89815.4075 (set end, n= 41 (70-29); i=5.5; PV=10,000; P/Y=C/Y=1; FV(solve)=89815.4075 Corpus required to provide for Rohit’s healthcare expenses for 5 years (at age 70) =5206182.89(set begin, n=5*12 (75-70); i=1.42180; PMT=89815.4075; P/Y=12; C/Y=1; PV (solve) =5206182.89 Corpus (at age 58 of Rohit) for expenses required from age 70 to 75 of Rohit= 23,11,607.465 (set begin, n=12 (70-58); i=7%; FV=5206182.89; P/Y=C/Y=1; PV (solve) = 23,11,607.………………………………Corpus (3) Total retirement corpus required at Rohit’s age 58 = Corpus (1) + Corpus (2) + Corpus (3) = 24004385.80 + 5550149.491 + 2311607.465 = 31,866,143 CFP Level 2 - Module 1 – Retirement Planning - Workbook Page 150