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Forget the State Pension, the FTSE 250 may be all you need

With the State Pension amounting to just over £8,500 per year, many individuals in the UK will need to make their own arrangements when it comes to retirement saving. Furthermore, the State Pension age is set to rise to 68 over the coming decades, with further increases seemingly likely as the proportion of retirees increases over the long run.

While there are a variety of products to choose from when it comes to retirement savings, such as SIPPs and Lifetime ISAs, the range of investments available is even greater. While this could cause investors to become uncertain about where to invest, keeping it simple through buying shares in FTSE 250 (INDEXFTSE:MCX) companies could be a shrewd move.

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Diverse opportunity

With around 50% of the FTSE 250’s performance being generated by the international exposure of its constituents, the index could be of interest to investors seeking to improve the geographic diversity of their portfolios. This may be because of Brexit, or simply because they wish to reduce their exposure to the UK given the growth opportunities elsewhere in the developed and developing world.

At the present time, of course, investor sentiment towards a number of UK-focused shares is relatively weak. This could mean that they underperform in the near term as the Brexit process continues. But from a long-term retirement perspective, now could be the right time to buy them. They may offer wide margins of safety, sound balance sheets and dominant positions in their respective industries. As such, in the coming years they could offer impressive growth potential. With the FTSE 250 being more UK-focused than the FTSE 100, it may therefore have greater value investing appeal at the present time.

Risk/reward

When it comes to the track record of the FTSE 250, it is easily ahead of the FTSE 100. It has generated annualised total returns of 8.5% in the last decade versus 3% annual returns for the FTSE 100. When dividends are added to those figures, they are around 11% for the FTSE 250 and 7% for the FTSE 100. Over the long term, a return that is 4% per annum above that of the FTSE 100 could make a significant impact on an individual’s retirement savings.

Certainly, the FTSE 250 is a relatively volatile index. Should there be a recession or a bear market in the coming years then it would be likely to fall further than a large-cap index. But the reality is that the mid-cap index has always recovered from bear markets to post higher highs. As such, for investors with long timeframes, its volatility is unlikely to pose a serious threat to their standard of living in retirement.

Of course, the FTSE 100 and small-cap shares can offer impressive returns in the long run, and are worthy of consideration. But from a risk/reward perspective, the FTSE 250 could be the most balanced index through which investors can generate a return that helps them to overcome the disappointing State Pension.

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Peter Stephens 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.