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When it comes to investing for retirement, the Self Investment Personal Pension (SIPP) is one of the most powerful tools in the UK investor arsenal. SIPPS fully controls its pension portfolio, apart from allowing all the usual tax easing and deferred benefits offered by the private pension scheme.
But how much money should investors put in order to enjoy a comfortable retirement?
Achieve financial freedom
According to the Pension and Lifetime Savings Association, retirees will need £43,100 a year to enjoy a comfortable retirement. It’s enough to cover holidays, birthday presents, new cars every five years, house remodeling, and of course general living expenses.
UK pensions will undoubtedly support this goal. Currently, those who earn the state’s all pensions receive £221.20 a week, or about £11,502.40 a year. However, for those who retired 30 years later, state pensions could be very different from today, potentially even smaller.
So let’s safely plan and plan your entire retirement income from SIPP. How big do you need? Following the 4% drawdown rule, it costs around £1.1 million.
Reaching a £1 million pension pot
Building a SIPP worth £1.1 million is not as impossible as it looks. Assuming investors receive a 20% tax credit based on their income bracket, if they throw away £500 a month, £625 in investment capital is available. And by investing this at a 10% return rate over 30 years, it will build SIPP worth £1.4 million more than what you need today.
Sadly, £43,100 a year may not be enough in the future due to inflation. Assuming that inflation rates average at 2% over the next 30 years, investors could actually need nearly £78,100 to enjoy a comfortable retirement or £2 million SIPP.
To achieve this without increasing capital contributions, investors must aim for returns of over 10%. Luckily, this is where stock picking offers a solution.
take Game Workshop (LSE:GAW) For example. Warhammer Creators have proven to be an incredible business designing high quality plastic miniatures for enthusiasts to fight across tabletops in addictive games. That is why we are currently ordering incredible pricing power for products that remain in high demand, even amid the ongoing cost-of-living crisis.
Then, over the past 30 years, investors who bought and held Game Workshop stocks achieved an average annual return of 16.3%. And at this rate, SIPP could reach its £2 million target at 24, not 30 years.
Please note that tax procedures depend on each client’s individual circumstances and may change in the future. The content in this article is for informational purposes only. It is not a form of tax advice or constitutes. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making investment decisions.
Risk and rewards
We need to celebrate the incredible achievements of Games Workshop. However, it is not certain whether or not they will be able to maintain double-digit profits for today’s new investors. After all, past performance doesn’t guarantee future outcomes, and today’s business is getting quite large.
There are also operational risks to consider. As manufacturing is concentrated in Nottingham, many logistics complexities have been introduced by exporting products to major markets such as North America and Australia. Plus, tariffs are being thrown out today.
So, Games Workshop could no longer be the stock that once created billionaires, but studying its success has prompted investors to discover new opportunities.