What is a realistic goal in building the long-term value of a Self-Invested Personal Pension (SIPP)?
While some people end up creating a SIPP nest egg of over a million pounds, I would consider a more modest goal, say £800,000. Here is how I would go about trying to make that idea a reality, in just five steps.
1. Set up a SIPP
First things first. If I did not already have a SIPP, my initial step would be to set one up.
Different providers offer a variety of benefits and cost structures, so I would choose the one I felt best suited my own needs.
2. Getting serious about contributions
The rules for how much people can contribute to their SIPP depend on a variety of factors.
In theory, it is actually possible to contribute over £800,000 to a SIPP, depending on individual financial circumstances.
In practice, I would aim for a regular contribution I felt offered me some real potential to hit my long-term target, but was also affordable.
Imagine I had 30 years until retirement. If I put £900 each month into my SIPP, that would already add up to contributions of £324,000 between now and then.
3. Investing for the long term
With a 30-year time horizon I could comfortably settle into a habit of investing for the long term.
My focus would not only be on possible rewards, but also reducing my risk. I would rather invest in what I saw as relatively low-risk, blue-chip shares than higher-risk but potentially more rewarding choices.
So I would look for companies I felt had a business model that set them apart from competitors in a market I expected to see ongoing high customer demand. For example, that might be the brand portfolio of Unilever, the distribution network of National Grid, or the proprietary technology of GSK.
4. Hitting a target return
I would be willing to invest my SIPP across both growth and income shares.
Investing £900 monthly for 30 years, to hit my final goal of £800,000 I would need to achieve a compound annual growth rate of less than 6%. I see that as eminently achievable.
Quite a few FTSE 100 companies offer yields of over 6% at the moment. Dividend income is only one part of the compound annual growth a share might offer me. If the share price goes up (or down) that could also contribute to my compound annual growth rate, for better or worse.
While I think a compound annual growth rate of under 6% is achievable, I would pay close attention to risk management. I would build a diversified SIPP portfolio of companies I felt strongly confident in and whose share price offered me a margin of safety.
5. Being patient
With regular contributions and a careful focus on selecting the right kind of shares, I do think I could hit my goal, although I know it’s not guaranteed.
Over a 30-year timeframe, I would be bound to run into bumps. They might be changes in my own financial circumstances, a stock market crash, or a bull run pushing many share prices up to what I thought were unattractive levels.
By trying to stay calm and focusing on my long-term strategy, hopefully I could navigate such challenges when building the value of my SIPP.