How much should a 40-year old put into an empty SIPP to aim for a million by 60?

What could £2,464 a month get you? Starting from scratch at age 40, one potential answer is a SIPP worth £1m by the age of 60.

Here’s how.

Slow and steady, with some help from HRMC

That sum is based on compounding at 5% annually. That compound growth could come from either dividends or share price growth, or a combination of both.

Now, share price declines could eat into the growth rate. Clearly, it is important to take time when building a diversified portfolio of blue-chip shares.

Still, on a 20-year timeframe – even recognising the likelihood of market downturns during that period – I see that 5% goal as a realistic one.

By the way, like I said, the sum presumes a monthly contribution of £2,464.

But bear in mind that, thanks to tax relief, a basic-rate payer could put around £1,972 per month into their SIPP and the exchequer would automatically top it up to £2,464.

Higher and additional-rate taxpayers are entitled to even more tax relief, albeit the process is more convoluted for them.

But that means that, for them, a much smaller monthly contribution would be transformed into £2,464 thanks to tax relief.

Quality and a long-term perspective

All things considered, I do no think this approach to having a seven-figure SIPP at 60 is complicated.

It requires consistency, a long-term perspective, and building a portfolio of shares that strike the right balance between potential reward and risk. With a 5% compound annual gain target I do not think that needs to be very racy. 

Instead, I think it can allow for a conservative approach to risk management.

1966 and all that

As an example, one share I should consider is City of London Investment Trust (LSE: CTY).

This FTSE 250 investment trust has a history that stretches back to the 1860s. Its current run of annual increases in the dividend per share started in 1966.

It may seem like an eternity since England last won the World Cup – but the trust’s shareholders have been getting a bigger payout per share every year since then!

At the moment, the yield is 3.7%: above the average for the FTSE 100 index, which is home to most of the trust’s holdings, such as HSBC, Shell, and Natwest.

3.7% is still below the 5% target I mentioned above, but recall that includes price moves too.

The City of London Investment Trust share price hit a new all-time high last week. It has gone up 65% over the past five years alone.

That is close to the 68% gain of the FTSE 100 over that period. The trust’s focus on leading British blue-chip shares helps it benefit from well-known UK shares doing well, but at the risk that it will also likely suffer when the FTSE 100 does poorly.

Past performance is not necessarily a guide to what will happen in future. But while City of London Investment Trust might not be the most exciting share on the London market, I expect it will likely be here for a long time yet – and hopefully still raising its dividends like clockwork.

As for when England will likely next win the World Cup, well…

The post How much should a 40-year old put into an empty SIPP to aim for a million by 60? appeared first on The Motley Fool UK.

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HSBC Holdings is an advertising partner of Motley Fool Money. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

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