As Britons, we’re not great at contributing to our pensions. In fact, around 30% of us aged 55-64 don’t have any pension savings at all. Meanwhile, a Scottish Widows report from 2016 found 47% of 30- and 40-year-olds are not saving adequately, or at all.
With that in mind — and because I recently turned 30 — here’s how I’d aim to build a huge £1.4m pension pot, starting at 30, and with no existing savings.
SIPP
Most Britons will have their pensions managed by firms like Phoenix Group or Legal & General. These are companies with significant offerings in the sector. Many of us have these managed portfolios through workplace pension schemes — at one point I had three.
But if starting with nothing, I’d open a Self-Invested Personal Pension (SIPP) with a reputable platform like Hargreaves Lansdown. This is how I manage my pension now. These accounts give owners full control of their money.
Aiming big
A target of £1.4bn might sound daunting, but it’s easier to achieve than most of us would think. It’s all about contributing regularly and over a long period of time.
In theory, this pension pot could deliver around £112,000 in annual income when I come round to withdrawing on it. That’s assuming I can invest it in stocks that pay a dividend yield of 8%. Right now, there are many companies, including Legal & General and Phoenix Group, that offer yields in excess of 8%.
And assuming a retirement age of 65, £112,000 would probably still be a decent amount to retire on, taking into account the impact of inflation over 35 years. In fact, £1 today is probably worth around 33p in 35 years’ time.
That means £112,000 would roughly be worth around £37,000 in today’s money. Adding a State Pension on top, it should be a comfortable figure to retire on.
Compounding is key
As noted, building a big pot requires frequent investment and time. That’s because we’re using a compound returns strategy. This is the practice of investing in dividend stocks and reinvesting the dividends year after year. The growth is exponential.
So how do we get there? Well, if I contribute £300 a month, and increased that contribution by 5% annually, while investing in dividend stocks paying 8% yields, and then reinvest every year for 35 years, at the end of period I’d have just short of £1.4m.
Towards the end of the investing period, the portfolio would be growing rapidly. In fact, if I left it for another five years, I’d have £2.1m in there.
Of course, a compound returns strategy isn’t guaranteed to work out, and I could lose money on the way. I may want to pick a more diversified portfolio than this 8%-yielding example were to suggest. Stocks with high yields don’t tend to offer much in the way of share price growth.
But it’s certainly the case that investing in mature dividend stocks is a safer bet than speculatively investing in growth.
