Retirement may seem a long time away but it only gets closer. Putting money into a Self-Invested Personal Pension (SIPP) now and investing it in the right way could help me to retire with more cash to spend, decades from now.
If I wanted to aim for a million in my SIPP on retirement, starting with just £56,000 now and making no further contributions, here are the steps I would take.
Figure out an investment strategy
While going from a £56,000 SIPP to one valued in seven figures is possible, it is still a very challenging objective.
Rather than simply buying shares I thought could do well and blindly hoping for the best, I would start by deciding what investment strategy I planned to follow as I tried to turn my hopes into reality.
One approach might be to earn big dividends and reinvest them. Another could be to buy into growing firms with share prices I felt did not accurately reflect their long-term potential. Or I may want to mix up my SIPP and invest in both growth and income shares.
Take a long-term approach
If I want to turn a £56k SIPP into a million pound one over 20 years, I would need to generate compound annual growth of 16%.
If I had a 30-year timeline, I could achieve my target with a lower compound annual growth rate of 11%. With 40 years to spare, I could build the same million pound SIPP by compounding annually at 8%.
In other words, having time on my side could help me build my SIPP to the same level even with less ambitious investment returns. That is why I am a believer in long-term investing.
Finding the right shares to buy
An 8% compound annual return may not sound that tough. Right now, for example, I could earn a 7.9% annual dividend yield by investing in shares of financial services powerhouse Legal & General (LSE: LGEN).
But no share is risk-free. That is why I always keep my SIPP diversified across a range of businesses. Legal & General cut its dividend after the 2008 financial crisis, for example, although it has long since surpassed the pre-crisis level and has lately been growing at around 5% a year.
Compound annual growth is not just about dividends either. It can also be positively or negatively affected by share price movements. Over the past five years, the L&G share price has moved down 3%. There is a risk it could fall further, for example if another financial crash leads to clients withdrawing funds and profits falling.
But if I had spare cash in my SIPP today, I would happily buy Legal & General shares. It has the sorts of characteristics I like in a share I buy to hold, including a large target market, distinctive brand and cheap-looking valuation.
Buying the right shares at the right prices and taking a long-term perspective, I think my million pound target could be entirely feasible.
The post Here’s how I’d aim to retire as a millionaire on a £56,000 SIPP appeared first on The Motley Fool UK.
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024