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At 28, retirement seems far apart. That fact can actually be useful when used in the right way. Because it means someone has decades of saving and investing in retirement. If they were to retire at age 67, the 28-year-old would have been nearly 40 years, and in that time they could try to increase the value of their self-investment personal pension (SIPP).
How much they may be depends on the amount they put in and the total return on investment. This is a benefit from costs such as the Stock Trade Commission and taxes.
Build a 7-digit pension pot
Even with a relatively modest 5% combined annual growth rate (CAGR), SIPP is extremely valuable £485K until age 67.
If the CAGR is 8%, it will be north of £1 million. At 10%, by 1967, SIPP is worth £1.7 million.
There are good times in the market, but there are bad times, especially for nearly 40 years. So, a 10% CAGR can be achievable, but it’s not always as easy as it sounds at first. In today’s market, I think 8% will be a realistic target that can be aimed at with SIPP.
That CAGR can come from both stocks rising at price and dividends paid along the way. However, stocks that fall in value will reduce that. Therefore, it is important to carefully select the stocks you want to buy.
Thinking and investing in the long term
One of my favorite things about investing in pensions is that they are completely useful for long term investments.
As I see, long-term investments have multiple benefits. This allows dividends to deteriorate with dramatic outcomes than shorter time frames. It also means that if a company has great potential, it has enough time for that possibility to come true.
So when I’m looking for stocks to buy for my SIPP, I focus on finding companies that I think have a good long-term outlook. I may not actually hold them for decades: things can change. But my starting point is to find imaginable stocks to hold in the long term. As Warren Buffett said, “If you haven’t thought about owning shares for 10 years, don’t think about owning them for 10 minutes”.
I’m looking far beyond tomorrow
As an example, one share I bought this year is Gregs (LSE: GRG).
I always think it’s a good starting point to see companies that have a resilient target market. No matter what else happens, people need to eat in a few decades.
However, it is also important to determine what competitive advantage a company has within that market. With its large stores, a loyal customer base and several unique products on sale, Gregs is apart from its rivals.
There is a proven, profitable business model. So far, so good. But I’m not just looking for good things workbut good investment. So I try not to overpay.
Greggs’ stock, which has dropped 35% since the turn of the year, looks like a potential bargain to me.
That fall reflects risks, including increased profitable national insurance costs. But from a long-term perspective, I think Gregs is ideal for my SIPP.