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Worried about the State Pension? I’d buy FTSE 250 dividend shares to build a £1m nest egg

Since the State Pension age is expected to rise over the coming decades, building a nest egg in order to generate an income in retirement is likely to become increasingly crucial for many people.

While the FTSE 100 may be an obvious place to start due to the size and scale of the companies it contains, the FTSE 250 could offer an appealing mix of income and capital growth potential.

As such, it could be a worthwhile means through which to build a £1m nest egg that can provide an income which is sufficient to allow you to enjoy financial freedom in older age.

State Pension

Increasing life expectancy and an ageing population mean that the State Pension may become even more unaffordable. This could mean that the political consensus gradually shifts towards further increasing the age at which it is paid beyond plans to raise it to 68 over the next couple of decades. In addition, the rate at which the State Pension payment grows may also be limited in order to improve its affordability.

Nest egg

As such, building a nest egg during your working life that is able to provide an income in retirement which offers financial freedom is likely to become increasingly important. The FTSE 250 could prove to be a sound means to achieve this goal, with its historic performance having been relatively strong. For example, over the last two decades it has recorded annualised total returns of around 9%. While there may be periods of time where lower returns are delivered by the index, over the long run a similar return could be highly achievable.

Investment opportunity

At the present time, a wide range of FTSE 250 stocks appear to offer wide margins of safety. This could be due to the risks faced by the UK economy, with Brexit likely to cause investors to adopt a more risk-averse attitude over the coming months.

While this may arguably be warranted, investors appear to have factored in many of the risks facing the UK economy. This could mean that while there is a period of disruption and volatility ahead in the short run, the valuations of mid-cap shares offer favourable risk/reward ratios that generate high returns in the long run.

Income appeal

While the FTSE 250 itself has a dividend yield of just over 3%, a wide range of its members offer income returns that are in excess of 5%. Therefore, it is entirely possible for an investor to build a portfolio of diverse shares that can deliver a high income return in the long run.

Building a portfolio valued at £1m by the time you retire may seem impossible at the very beginning. But, assuming a 9% total return per year, investing £100 per month over a 50-year working life could allow you to reach that goal. As such, the FTSE 250 could be a worthwhile means of overcoming a rising State Pension age, as well as providing a high income return in retirement.

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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.