How much should a 50-year-old put in a SIPP to earn a monthly passive income of £1,000?
Around one in five Britons enter their 50s with next-to-no retirement savings, quickly raising the alarm to suddenly start using a Self-Invested Personal Pension (SIPP). The good news is, even with less than 20 years left until retirement, thereâs still enough time to build a healthy pension pot and aim for a more comfortable lifestyle.
The State Pension alone will soon be paying out roughly £12,550 a year as of April. This alone isn’t enough to meet the minimum estimated cost of living. But when combined with an extra £1,000 a month from an investment portfolio, life in retirement becomes a lot more flexible.
So for those whov’e just turned 50 with no savings, hereâs how to aim for a £1,000 monthly passive income using a SIPP.
Crunching the numbers
Earning an extra grand a month is the equivalent of £12,000 a year. And by following the 4% withdrawal rule, a portfolio that can sustainably generate this income will need to be worth roughly £300,000.
Obviously, thatâs a pretty hefty sum, particularly for someone aiming to retire at 68, meaning they may only have 18 years to reach this lofty goal. The good news is, for the average person, this is more than achievable with a bit of frugality.
According to the Office for National Statistics, the median income for someone in their 50s is around £42,000. After tax, thatâs roughly £34,000 at todayâs current rates. And while rent and general living expenses will eat into this, those who sacrifice and manage to put aside £500 each month are on track to hit their retirement goal.
At a £42,000 salary, an investor is paying the 20% Basic Rate of income tax. But that also means theyâre eligible for 20% tax relief on all deposits made in a SIPP.
So that £500 saved each month becomes £625 of investable capital. And investing £625 at the 8% average annual return of the stock market for 18 years translates into a pension pot of just over £300,000.
Thereâs only one problem: due to inflation, a £300,000 pension pot likely wonât be enough in 2044. Luckily, there’s a solution.
Stock picking to the rescue
Rather than relying on index funds to target an 8% long-term average return, investors can seek to build significantly more wealth by investing exclusively in the best businesses. And Avon Technologies‘ (LSE:AVON) shareholders have experienced this first-hand.
Over the last 18 years, Avon’s generated a total return of 1,518%. On an annualised basis, thatâs the equivalent of a 16.7% return. And anyone whose been drip feeding £625 a month along the way is now sitting on a jaw-dropping £843,950 pension pot â almost three times more than passive index investors!
This enormous success stems from supplying mission-critical protective equipment to military and law enforcement agencies. And with growing geopolitical tensions leading to substantially more defence spending, the company continues to enjoy robust demand for its products with a record order book.
Having said that, itâs important to remember that geopolitical tailwinds are ultimately cyclical. And once ongoing conflicts are eventually settled, Avonâs revenue and profits could similarly start to cool. Nevertheless, itâs a stock that could be worth a closer look for investors seeking to build a diversified SIPP portfolio.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
