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At 28, retirement can seem a long way away. That fact can actually be helpful if used in the right way, as it means someone has decades in which to save and invest for retirement. If they end up retiring at 67, a 28-year-old would have almost four decades during which they could try to build up the value of a Self-Invested Personal Pension (SIPP).
How much they might end up with depends on the amount they put in and what the total return on investment is, net of costs like share dealing commissions and taxes.
Building a seven-figure pension pot
Even at a relatively modest-sounding 5% compound annual growth rate (CAGR), the SIPP will have a value of over £485k by the age of 67.
If the CAGR was 8%, that value would be north of a million pounds. At 10%, by 67 the SIPP would be worth £1.7m.
Markets have good times but bad ones too, especially across almost four decades. So a 10% CAGR may be achievable, but not necessarily as easy as it may first sound. In today’s market, I think 8% would be a realistic target I could aim for in my SIPP.
That CAGR could come both from shares going up in price and any dividends paid out along the way. But shares falling in value would reduce it. So, careful selection of what shares to buy is important.
Thinking and investing for the long term
One thing I like about investing in a pension is that it lends itself perfectly to long-term investing.
Long-term investing can have multiple benefits as I see it. It allows dividends to compound with more dramatic results than on a shorter timeframe. It also means that if a company has brilliant potential, there is hopefully enough time for that potential to be realised.
So, when looking for shares to buy for my SIPP, I focus on finding firms I think have excellent long-term prospects. I may not actually end up holding them for decades: circumstances can change. But my starting point is to find shares I could imagine holding for the long term. As Warren Buffett said, “if you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes”.
Looking well beyond tomorrow
As an example, one share I bought this year is Greggs (LSE: GRG).
I always think it is a good starting point to look at businesses that have a resilient target market. Whatever else happens, decades from now people will need to eat.
But it is also important to determine what competitive advantage a company has within that market. With a large store estate, loyal customer base, and some unique products on sale, Greggs sets itself apart from rivals.
It has a proven, profitable business model. So far, so good. However, I am not looking just for a good business, but a good investment. So I try not to overpay.
Having fallen 35% since the turn of the year, the Greggs share price looks like a potential bargain to me.
That fall reflects risks, such as higher National Insurance costs eating into profitability. But, from the long-term perspective, I believe Greggs is an ideal fit for my SIPP.
