How much do you need in a SIPP to aim for a £3,000 monthly retirement income?

When it comes to investing for retirement, few investment vehicles come close to the power of a Self-Invested Personal Pension (SIPP). Not only does it eliminate the tax burden of capital gains and dividends, but the vehicle also provides tax relief that can supercharge the wealth-building process.

So let’s say someone’s aiming for a £3,000 retirement income to combine with the British State Pension. How much do they need to invest? Let’s explore.

Breaking down the numbers

Since this is a retirement portfolio, we’re going to follow the classic 4% withdrawal rule. That means every year an investor draws down 4% of the value of their investments to live on. And if the goal is £3,000 a month, or £36,000 a year, then a pension pot will need to be worth roughly £900,000.

It goes without saying that’s a pretty large chunk of change. But thanks to the power of a SIPP, in reaching this goal just £750 each month could take slightly over 25 years – perfect timing for someone who’s just turned 40.

Let’s say someone’s paying the Basic income tax rate. That means they’re eligible for 20% tax relief on all deposits made into a SIPP. Suddenly, a £750 monthly deposit is automatically topped up to £937.50, courtesy of the British government. And investing £937.50 at an 8% annualised return for just over 25 years translates into a pension portfolio worth £900,000.

What if 25 years is too long?

Sadly, not everyone has the luxury of a long time horizon. The good news is, stock picking offers a potential solution.

Instead of relying on passive index funds, investors can opt to own individual businesses directly. There’s no denying this strategy comes with increased risk and demands far more discipline. But it’s also how investors can stumble upon big winners like 4imprint Group (LSE:FOUR).

Over the last 15 years, the marketer of promotional merchandise has delivered a massive 1,685% total return, averaging 21.2% a year. And at this rate, the journey to £900k is cut to just 13.5 years.

Still an opportunity?

With its market-cap now just over £1bn, 4imprint’s days of delivering 21% annual returns are likely behind it. But that doesn’t mean it’s not capable of surpassing the market average of 8%.

The firm has established itself as a leader within the small business community, controlling an estimated 5% of the highly fragmented promotional market. And with a highly cash generative business model and practically debt-free balance sheet, the stock continues to garner a lot of favour with institutional investors. Five out of six of them currently rate the stock as a Buy or Outperform.

However there are, of course, risks to consider. Ongoing economic pressures and supply chain disruptions make an unfavourable operating environment. And it’s why the shares have actually fallen by 38% over the last 12 months.

This volatility perfectly highlights the group’s sensitivity to the economic landscape. And should unfavourable conditions persist longer than expected, order intake’s likely to suffer, keeping the stock on its current downward trajectory.

However, with a solid track record of navigating such market conditions, I think 4imprint might still be worth a closer look for long-term SIPP investors.

The post How much do you need in a SIPP to aim for a £3,000 monthly retirement income? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended 4imprint Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.