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Retirement saving: why I’d buy FTSE 250 stocks rather than FTSE 100 shares to make £1m

Having a sizeable nest egg from which a retirement income is drawn in older age is likely to become increasingly important for a wide range of people. The State Pension age is on the rise, while its current level of £8,767 is likely to prove inadequate for many retirees to live off.

As such, investing in the stock market prior to retiring could be a worthwhile step for you to take.

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Of course, deciding where to invest your hard-earned cash could be a crucial decision. While the FTSE 100 may be a better-known and more internationally-focused index that offers a high income return, the FTSE 250 could deliver stronger capital growth that ultimately produces a larger nest egg by the time retirement comes along.

Growth potential

While the FTSE 100 offers an impressive long-term growth outlook, its performance may prove to be inferior to that of the FTSE 250. One reason for this is the fundamentals of the two indexes. The FTSE 100 is made up of the largest companies that are listed in the UK. By their very nature, they are often mature businesses that do not deliver the same level of growth that they have done in the past. The FTSE 250, meanwhile, is made up of smaller businesses that may be able to grow at a faster pace than their larger peers.

This situation has been evident over the last two decades. While the FTSE 100 has recorded less than 1% in annualised capital returns since 1999, the FTSE 250’s capital growth has been over 6% per year during the same time period.

Brexit risks

Looking ahead, the FTSE 100 could outperform the FTSE 250 in the short term. Since the former index is more internationally-focused than the latter, it may be able to withstand the potential risks that the UK economy faces over the coming months. And, since larger companies are often more diversified and more financially sound than their smaller peers, the FTSE 100 may offer a more defensive and less volatile investor experience.

Despite this, the FTSE 250 could offer relatively high appeal for long-term investors who are looking to generate capital growth so that they have a larger nest egg by the time they retire. The index has a number of members that appear to have the potential risks posed by Brexit already factored into their share prices. This could mean that the index offers a wide margin of safety, with it having always recovered from bear markets to post higher highs.

Relative appeal

While the FTSE 100 is a highly appealing place to invest – especially for investors who are looking to generate an income from more defensive and diverse stocks – the FTSE 250 may be a better place to generate capital growth. Ultimately, for someone with many years to go until retirement, the task of producing a higher capital return to deliver a larger nest egg may be made easier by investing in mid-cap shares.

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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.