As an investment advisor, you have been approached by a client - Rakesh for your advice on
Question:
As an investment advisor, you have been approached by a client - Rakesh for your advice on investment plan. He is currently 40 years old. He plans to work for 20 years more and retire at the age of 60. Rakesh has decided to invest his bank balance and future savings in a balanced mutual fund scheme that he believes will provide a return of 9 percent per year. You agree with his assessment. Rakesh seeks your help in answering several questions given below. In answering these questions, ignore the tax factor.
(i) Once he retires at the age of 60, he would like to withdraw Rs.800,000 per year for his consumption needs from his investments for the following 15 years (He expects to live upto the age of 75 years). Each annual withdrawal will be made at the end of the year. How much should be the value of his investments when Rakesh turns 60, to meet this retirement need?
(ii) How much should Rakesh save each year for the next 20 years to be able to withdraw Rs.800,000 per year from the end of the 21st year? Assume that the savings will occur at the end of each year.
(iii) Rakesh is curious to find out the present value of his wife's lifetime salary income. For the sake of simplicity, assume that his wife's current salary of Rs.500,000 will be paid exactly one year from now, and her salary is paid annually. What is the present value of her lifetime salary income, if the discount rate applicable to the same is 7 percent? Rakesh's wife expects that her salary will increase at the rate of 12 percent per year until retirement. Rakesh's wife also has 20 more years to retirement.
(iv) Why is it important for Rakesh to consider the present value of money while making his retirement plans? (3+3+7+2=15 Marks)