Here’s how I’d aim to retire as a millionaire on a £56,000 SIPP

Christopher Ruane considers some investment principles he’d apply if trying to build his SIPP up to a valuation of a million pounds.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged Caucasian woman deep in thought while looking out of the window

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

With a P/E ratio of 9, is the Aviva share price a bargain?

Christopher Ruane looks at the Aviva share price and considers some strengths and weaknesses of the FTSE 100 insurance business.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Investing Articles

Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room…

Read more »

Investing Articles

2 ISA shares to consider for a large passive income!

Looking for dividend shares to buy in a Stocks and Shares ISA or Lifetime ISA? Royston Wild reveals two of…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Entrepreneur on the phone.
Investing Articles

As the Vodafone share price slides 6% on lacklustre H1 results, what does the future hold?

After posting moderate results this morning, Vodafone saw its share price sink further, erasing this year's gains. Our writer looks…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »

Investing Articles

2 top shares I’ve bought for my Stocks and Shares ISA in November

This writer reveals a pair of fast-growing businesses that he's recently added to his Stocks and Shares ISA for the…

Read more »