Jack has just signed up to save €200 per month in the National Instalment Savings Plan. In order for Jack to get the maximum guaranteed return under the Plan, how many years from now must he stay invested?

Jack has just signed up to save €200 per month in the National Instalment Savings Plan. In order for Jack to get the maximum guaranteed return under the Plan, how many years from now must he stay invested?

• A. 6 years
• B. 3 years
• C. 5 years
• D. 7 years

Answer: (A)

The key idea is that the guaranteed return from the National Instalment Savings Plan increases with how long you keep your money invested, up to a fixed maximum term. With monthly contributions, you’re earning a guaranteed rate on the money as it stays in the plan, and the longer you stay, the more of that guarantee you collect. There’s a cap on how long the guarantee increases, so staying beyond that point doesn’t boost the guaranteed return further. In this scenario, the maximum guaranteed return is reached by remaining invested for the full term offered by the plan, which is six years. Withdraw earlier, and you sacrifice part of the guaranteed return; staying six years captures the highest guaranteed benefit the plan provides. Therefore, six years is the optimal horizon to maximize the guaranteed return.

The key idea is that the guaranteed return from the National Instalment Savings Plan increases with how long you keep your money invested, up to a fixed maximum term. With monthly contributions, you’re earning a guaranteed rate on the money as it stays in the plan, and the longer you stay, the more of that guarantee you collect. There’s a cap on how long the guarantee increases, so staying beyond that point doesn’t boost the guaranteed return further.

In this scenario, the maximum guaranteed return is reached by remaining invested for the full term offered by the plan, which is six years. Withdraw earlier, and you sacrifice part of the guaranteed return; staying six years captures the highest guaranteed benefit the plan provides. Therefore, six years is the optimal horizon to maximize the guaranteed return.