Question

John and Peter started their retirement savings at age 21. Since John is a very conservative person, he chose a very safe mutual fund. However, Peter chose an aggressive mutual fund. They have saved monthly the same amount for 40 years. John earned 10% annual return from his mutual fund but Peter earned 5% annual return from his mutual fund. Choose which one is correct about their account balance when they retired.

A) John’s retirement account balance is exactly 50% of Peter’s balance

b) John’s retirement account balance is more than 50% of Peter’s balance

c) John’s retirement account balance is a little less than 50% of Peter’s balance

d) John’s retirement account balance is much less than 50% of Peter’s balance

Answer 1

Answer: b.) John's retirement account balance is more than 50% of Peter's balance.

Calculation:

Here given that John is earning a 10% return on his investment and Peter is earning a 5% return on his investment.

While investing the same amount and earning a higher return would help John's retirement account to grow more than Peter's account. Among all the options only option-2 seems to be fit with this condition.

For an explanation please find attached the image for comparison of John and Peter's balance after 40 years.

For ease of calculation, I've assumed that both of them have invested $100 per month. You can take any value there.