Mr. Smart (60) has just retired from service. He is entitled to a pension of Rs. 4,80,000/- p.a. received yearly in advance. The pension adjusts partially with inflation to the extent of 50%. Mr. Smart’s wife (Mrs. Smart-58) is entitled to the pension for her lifetime in case of the demise of Mr. Smart before her. Nobody else is dependent on the couple. The couple stays in their own home. Mr. Smart received Rs. 40 lakhs (after tax) as retirement dues. Their current living expenses are equal to the pension amount.
Mr. Smart’s employer will continue to provide a family floater Mediclaim policy for both their lifetime that is considered adequate for their needs. Inflation is to be assumed at 6% p.a. Life expectancy is to be assumed to be 87 years for Mr. Smart and 85 years for Mrs. Smart. The couple wants to make provision for expenses on social occasions that arise & leisure travel expenditure to the tune of Rs. 1,00,000 p.a. (inflation 6% p.a.) apart from compensating for the inflation adjustment shortfall in the pension income. Assume the expenditure arises at the beginning of each year. The couple seeks your advice.
Question 1: If discounted @ 5% p.a. and assuming that the adjustment is fully required at the beginning of the year, the inflation adjustment required is ______.
