Question

Which of the following strategies is the best for retirement investing for these 25-year-olds?

Answer choices:

A. Juana invests $1,500 per year in her company's 401(k) plan, and her company provides a $500 match every year. Her investment choice is the S&P 500 index fund.
B. Francis has a very tight budget and is committed to saving $2,000 per year in his company's 401(k) plan once he is 35 years old, after he has bought a house and paid off his student loans.
C. Bill worries about the risks in the stock market, so his primary method of saving for retirement is to set aside $2,000 per year into a savings account.
D. Kamil's company has a 401(k) plan with a match program. He forgot to fill out the paperwork, so he just puts $1,500 per year into an IRA. His investment choice is the S&P 500 index fund.

Answer 1

The best retirement investing strategy for a 25-year-old is starting early with a company 401(k) plan that offers a match, like Juana, who invests in an S&P 500 index fund which has the potential to earn higher returns due to compound interest.

Step-by-step explanation:

The best strategy for retirement investing for a 25-year-old among the provided options is choice A: Juana invests $1,500 per year in her company's 401(k) plan, with a $500 match from her company, and her investment choice is the S&P 500 index fund. This option offers the benefits of early investment, employer matching which boosts the investment by a significant percentage, and exposure to a diversified stock portfolio which has the potential to earn a higher return over time, especially given the power of compound interest. The example of saving $3,000 at age 25 and achieving a 7% real annual rate of return over 40 years illustrates how an early start to investing can lead to substantial growth, justifying the preference for Juana's strategy. Comparatively, Francis starts saving later, Bill avoids the stock market and misses potential higher returns, and Kamil misses out on employer matching funds by not investing in his company's 401(k) plan.