With a relatively high cost of living in many parts of the UK, the State Pension may prove to be insufficient for many retirees. It currently amounts to just £8,767 per year, while the age at which it will start being paid is set to gradually rise over the long run.
One potential solution to overcoming a disappointing State Pension is to invest in FTSE 250 shares. The index offers diversity, a strong track record of growth, and income opportunities. Therefore, it may provide a means of becoming less reliant on the State Pension in older age through building a retirement nest egg from which to generate a passive income.
Growth opportunities
While the FTSE 250 is often viewed as a proxy for the UK economy’s performance, the index generates around half of its revenue from international markets. This means it offers greater diversity, and potentially less risk, than many investors realise. As such, it could be a more attractive place to invest for anyone seeking to capitalise on the growth opportunities that emerging markets, such as China and India, offer.
Such markets could provide a tailwind for a range of mid-cap shares, thereby boosting their profitability. Furthermore, the index appears to offer a margin of safety at present, following a period of uncertainty. Risks such as Brexit and a global trade war have weighed on its performance over the last few years, and may have created buying opportunities for investors who adopt a long-term outlook.
Of course, buying stocks during volatile periods for the wider index can lead to paper losses in the short run. But with the FTSE 250 having a strong track record of delivering successful recoveries from bear markets, it’s likely to produce strong growth in the long run – especially for investors who buy mid-cap shares while they trade at low levels.
Income potential
As well as its growth prospects, the FTSE 250 offer surprisingly strong income potential. For example, it currently has a dividend yield of 3.2%, with many of its members offering yields that are in excess of 5%, or even 6%. This could mean an investor seeking to generate a passive income is able to achieve their goal from buying a diverse range of mid-cap shares.
Furthermore, the profit growth prospects of many mid-cap shares means they may be able to pay rising dividends over the long run. This could enable an investor to generate a higher income return today from mid-cap shares compared to other assets, such as cash and bonds, as well as inflation-beating income growth over the coming years.
As such, from a growth and income perspective, the FTSE 250 could be an appealing place to invest for anyone who doesn’t wish to rely on the State Pension in older age.