£500k in a Self-Invested Personal Pension (SIPP) sounds like a lot of money. But it may not be enough for a comfortable retirement given our life expectancy these days.
According to experts, we need a pension pot of doubel that figure today to enjoy a comfortable retirement. And that figure is only going to increase as time goes by and inflation pushes prices up.
How much money do I need for retirement?
A lot of people tend to underestimate how much money they’ll need. For example, a recent survey by UK wealth management firm Saltus, which asked 2,000 people how much they thought they’d need for a comfortable retirement, found that on average, respondents believed a pension pot of £536k would be enough.
Realistically though, a £536k pension may not cut it if we want a ‘comfortable’ retirement. According to the Pensions and Lifetime Savings Association (PLSA), we need £43k a year today for this kind of retirement. To generate that level of income starting at age 65 (and not have to worry about running out of money later in life), we’d require a pension total of around £1m or so (I’m ignoring the State Pension for now).
Building a £1m pension
The good news is that building up to £1m+ is very achievable with a regular savings plan and a sound long-term investment strategy.
Contributions into a pension typically come with tax relief. Put £1,000 into a SIPP as a basic-rate taxpayer and the government will add in another £250 (higher-rate and additional-rate taxpayers can claim back more tax relief at the moment). This kind of bonus can really propel someone’s retirement savings higher.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Investing for growth
What can also propel our savings is a good investment strategy. Put together a solid mix of stocks and/or funds and it shouldn’t be that hard to generate a return of 7%-10% a year over the long term. With that kind of return, our savings can grow very quickly due to the power of compounding.
Now, there are many different investment strategies we can pursue within a pension. Some people like to invest in value stocks. Others like to buy growth stocks.
Personally, I’m a big fan of investing in ‘quality’ stocks. These are the stocks of high-quality businesses that are very profitable and have strong balance sheets (also seen as Warren Buffett-type stocks!)
One product that focuses on quality stocks is the iShares Edge MSCI World Quality Factor UCITS ETF (LSE: IWQU). This is a global tracker fund that focuses on companies with strong and stable earnings.
This ETF has a great track record. Between its launch in 2014 and the end of July, it returned about 10.7% per year. Over the last five years to the end of July, it returned about 80%.
There are no guarantees that this product will continue to perform well going forward, of course. While quality investing is an excellent long-term strategy it doesn’t work well all the time. No strategy does.
I see it as a solid core option to consider for a SIPP though. With this as a core holding, and a few individual stocks on top for extra growth, 9% annual returns over the long term could be achievable.
Invest £1,000 a month, and obtain a 9% annual return, and someone could potentially build a £1m SIPP (in today’s money) in a little over 25 years.
