Is the FTSE 250 the best way to improve your retirement income as the State Pension age rises?
With the age at which the State Pension is paid set to increase from 65 to 68 over the next 20 years, investing in the FTSE 250 could become increasingly popular. After all, many people may require a sizeable nest egg in order to enjoy the financially-free retirement that they dream of – especially since the State Pension amounts to just £164 per week.
Given that the FTSE 250 has delivered an annualised total return of over 9% in the last 20 years, it appears to have a strong track record of growth. Therefore, it may be of interest to investors in a variety of financial circumstances over the coming years in my opinion.
Value opportunity
Since members of the FTSE 250 generate around 75% of their income from the UK economy, the index may offer good value for money at the present time. There are continued fears surrounding Brexit and its potential impact on the UK economy. Many consumers and businesses seem to be waiting for greater clarity on how the process will progress, as well as how it will impact the wider growth rate. With the IMF having recently downgraded the UK’s economic outlook, its prospects appear to be relatively downbeat.
However, this could prove to be a good time to buy FTSE 250 shares. They may be trading on low valuations in many cases, and could therefore offer wide margins of safety. This may increase their return potential over the long run, while also reducing risk as investors may have already priced in potential challenges that may or may not appear in future.
Growth potential
With the FTSE 100 including some of the largest and most financially-stable companies in the world, it may offer less volatility and risk than the FTSE 250. However, mid-cap shares could grow at a faster rate due in part to their size, with history showing that growth rates among smaller companies can be stronger than among large-cap peers.
This could make the index especially attractive to investors with long-term outlooks, since their focus could be on capital growth rather than income. On the topic of income though, the index currently yields 3%, which is higher than the rate of inflation. It also provides further evidence that the index could offer good value for money, since it is relatively high compared to its historic yield over recent years.
Outlook
Of course, the index could experience a period of heightened volatility. It has already fallen by 14% from its all-time high recorded in May, which is well on its way towards bear market territory. Further declines cannot be ruled out in the near term due in part to the risks that the UK economy is currently facing, as well as investor sentiment that is generally weak. But from a long-term perspective, the index could provide a sound means of overcoming what may prove to be an increasingly disappointing State Pension.
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