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The idea of retiring as a millionaire has its own appeal, in terms of financial security, even if one does not necessarily want a champagne-quaffing lifestyle. But is it really possible to turn a Self-Invested Personal Pension (SIPP) from having nothing in it to boasting a seven-figure valuation in just 25 years?
Yes, it is. Here’s how.
How to aim for a million
The growth (or lack of it) in a SIPP can be worked out fairly easily. How much you put in matters, and so does the compound annual growth rate (CAGR).
Even beyond what you put in, though, there may be extra money to invest.
Most people are unable to withdraw SIPP funds before a certain age. So, as well as the money you put in, there may be additional money available to invest, for example, because you have sold some shares for more than you paid, or earn some dividends that you then compound to buy more shares.
Doing that, investing £900 each month and compounding at 10% annually, the SIPP should be worth £1.1m after 25 years.
Setting realistic goals
Now, in fairness, while a 10% CAGR may not sound much, it is actually quite challenging.
Remember that this is an average over a quarter of a century, a time period when there may be some very bad times in the market as well as hopefully some excellent ones.
Still, in the current market, I do think it is achievable. By carefully selecting the right shares to buy and hold, paying close attention to and managing risks, focusing on likely returns and not being too greedy, I think a smart investor can try to achieve a 10% CAGR.
One share to consider
Part of the risk management I mentioned involves diversifying the SIPP across a range of companies.
For now, though, I will highlight one share I think SIPP investors should consider both for its long-term dividend and income potential: Phoenix Group (LSE: PHNX).
The FTSE 100 insurer has a progressive dividend policy, meaning it aims to grow the payout per share each year. I think this is attractive, particularly given that it already yields 8.6%. This is as long as it is able to deliver on its dividend policy (that is never guaranteed for any company).
The prospects for share price growth could become more mixed. Past performance is not necessarily a guide to what will happen in future, but Phoenix’s five-year share price growth of 7% is modest. The FTSE 100 index is up 45% across that time frame.
Still, the share has leapt 14% since last month and I think the long-term investment case is attractive. Phoenix has a large customer base, multiple well-known brands, and expertise in a complex area of finance.
Like all shares, it carries risks. For example, a severe property downturn could cause it to have to revalue its mortgage book, potentially eating into profits.
But, on balance, I feel Phoenix is worth considering with the long-term approach a SIPP enables.
