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How much will someone want to have a self-invest individual pension (SIPP) before they retire?
The answer to that question depends on three main variables.
First, what? Timeline?
This example assumes a retirement age of 67. So for someone who is 40 today, that means a 27-year-old time frame.
The second variable is Investment amount.
Here I am assuming £600. In reality, everyone is different and makes their own choices about whether they can afford to put aside SIPP regularly.
Small differences can be enlarged over time
The third variable is Combined annual growth rate It was achieved throughout the life of SIPP.
What appears to be small differences can have a major impact thanks to the long-term combined effects.
For example, at a combined annual growth rate of 5%, there are 67 retirement funds worth around £402,600 when a 40-year-old today donates £600 a month.
However, at a combined annual growth rate of 8%, the fund is nearly £652,000. That’s a big difference!
Choosing a realistic strategy for investment
That 8% combined annual growth rate does not necessarily require a dividend yield (or actually dividends) of 8%.
This is a combination of dividends and capital growth, minus capital losses from stocks that are less than costs.
So I think it’s achievable in today’s market.
However, not everyone investing in SIPP has a lot of experience and may not want to spend a lot of time monitoring investments for the next quarter of a century or so.
I think it will help you take a realistic approach – not too greedy, you stick to what you understand, diversify across different stocks and take risks seriously.
Plus, if you eat up the overall return, it makes sense to choose a competitive SIPP in terms of fees you will be taxed.
One Share to Consider SIPP
To explain that approach, one share investors should consider is insurance companies Aviva (LSE: off).
The current dividend yield of 6.7% is already a key way to achieve a combined annual growth rate of 8%. Following the cuts in 2020, annual dividends per share have been growing stronger in recent years.
Aviva’s stock price has risen 8% over the past year, more than five times its price.
I think business can potentially continue to perform strongly. Insurance is a high-resistible market with resilient demand, and Aviva holds the position of command in the UK general insurance sector.
That could be even stronger with the proposed acquisition of rivals Direct line. It should provide an economies of scale, but I also see the risk that the direct line mixed performance in recent years could continue and could serve as a resistance to Aviva.
Still, thanks to its proven business model, strong market share and juicy dividends, Aviva considers it a share that SIPP investors should consider.