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I wish I had had the maturity of my 23 year old daughter, Becky, when I was 23. She has given me $2,000 to invest in an IRA for her. I bought her a small land note at 50% LTV, with a good payor, and with recourse back to the note seller. Certainly a safer investment than she could find in the stock market. Her yield for the next 180 months will be 24%. Becky will retire in 48 years at the age of 70. Assume that she can earn 14.5% on the average in that time. At 70 when she needs to begin withdrawing from her IRA, that $2,000 will have grown to more than $1.5 million before taxes or enough to throw off $172,000 a year before taxes for the next 20 years to age 90 (assuming that her investment continues to grow at 10% while she gradually withdraws it.)
You may make the argument that inflation will eat into the value of that $172,000 per year. But if we have 3% annual inflation, on average, over the next 48 years, it would still be the equivalent of $30,000 per year or so for 20 years in today’s buying power…not bad for one $2,000 contribution.

The fly in the ointment is, can she make 14.5% per year on that investment? Sir John Templeton, the 82 year old guru of mutual fund investing says, in the current issue of Mutual Funds Newsletter (800-442-9000),

“If you’re looking out 40 years, I think you can probably do 15% a year. (The short term outlook is not as rosy, because we’re coming off such a rapid run-up already.) A strong reason is that progress is speeding up. The improvements in most companies and industries are coming faster and faster. It’s been an absolutely marvelous time to live. Just in my 82 year lifetime, the world standard of living has quadrupled, and that’s amazing. Through history, it took 1,000 years to double the standard of living. The reasons why it is speeding up have not stopped; in fact they’ve speeded up. Take the amount of money spent on scientific research; 82 years ago, the world spent about $1 billion every three months. Now the world is spending $2 billion a week on scientific research.“

I am optimistic for Becky, and even more so for her younger sister.

by Jon Richards

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