Here’s how I’d aim to build a £50K SIPP into a £250K retirement fund

Our writer outlines the approach he would take to try and increase the value of his SIPP multiple times in coming decades before retirement.

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By investing in a Self-Invested Personal Pension (SIPP) and aiming to grow the value of the funds invested, I think it is possible to increase the financial basis one has for retirement.

As an example, if I had £50,000 I could put into a SIPP now or over the next several years, here is how I would try to build up a value of a quarter of a million pounds even without putting any more money in.

Getting the timeframe right

Let me begin with what I think is an obvious point but one worth mentioning anyway: this is not a quick plan.

I am effectively talking about quintupling the value of my SIPP. I would be happy to own shares that increased by a factor of five rapidly — but they are few and far between.

Instead, I take a long-term approach to investing and would want to keep risks to a level that was comfortable for my own tolerance.

Long-term value creation

Simply by buying shares for less than they are worth, I could hope to increase my SIPP’s valuation. Then again, some shares trade for less than their intrinsic value year after year.

So, my approach would not focus only on price. Rather, I would focus on companies I felt had the opportunity to grow their profits over the long term – with share prices that do not reflect that.

Growth or income?

An example of a share that I think could turn out to be undervalued relative to its long-term commercial prospects is JD Sports (LSE: JD).

The sports retailer has set out an ambitious multiyear growth plan that envisages opening hundreds of new shops annually. This year it has also announced plans to take over a large US rival. Yet the shares are 14% cheaper than a year ago. They have only risen 8% in five years, less even than the 11% achieved by the FTSE 100 index of which JD is a member.

If I had bought this for my SIPP five years ago, then, I would be looking at a share price just 8% higher than I paid and a paltry yield of 0.7%.

Why not just go for high-yield shares instead?

After all, a number of FTSE 100 shares have yields above 9% right now. If I could compound my SIPP at 9% annually, my £50K would be worth over £250K in under two decades.

Growth and income potential

I do own some high-yield shares in my SIPP.

But to aim for the target, I would want to make sure I had some growth shares like JD in there too. My theory is that if a business continues to do very well over the long term, that will hopefully show up in a growing share price if I have not overpaid. Dividend income could be the cherry on top.

With its large store network, strong brand, international footprint, and pricing power, I think JD could grow significantly in coming years. Maybe I will be wrong, if for example a weak economy cuts consumer spending on pricy trainers.

But by diversifying my SIPP and considering value creation from share price growth not just dividends, hopefully I could do well in coming decades.

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 positions in JD Sports Fashion. 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.

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