Since the State Pension amounts to £8,767 per year, it is unlikely to provide the level of financial freedom that retirees deserve. In fact, it is unlikely to be sufficient to pay for all of life’s necessities, never mind discretionary spending in older age.
As such, building a nest egg that can provide a passive income in retirement is crucial for anyone who wishes to have a generous income in older age. Although that may not sound like an easy process, it is possible to more than double your State Pension by investing £10 per week in FTSE 250 shares over the long run.
The FTSE 250 is sometimes overlooked by UK investors. They often focus on the FTSE 100 due to its international exposure and the fact that it is made up of the largest listed companies in the UK.
However, the FTSE 250 is still heavily influenced by the world economy. Around half of its members’ income is derived from outside the UK, while its track record of growth suggests that it could be a better means of building a nest egg than investing in the FTSE 100.
In fact, over the last 20 years, the FTSE 250 has recorded an annualised total return of 9%. Assuming the same level of growth in future, you may not need to invest significant sums of money in order to build a nest egg that can provide an income in retirement which beats the State Pension.
For example, investing £10 per week over a period of 45 years would produce around £273,000 assuming a 9% annualised return. From this, withdrawing 4% per year would lead to an income of nearly £11,000. This is ahead of the State Pension, while a 4% withdrawal is often viewed as an amount which is sustainable in terms of it not eating into your capital. The FTSE 100, for example, currently yields over 4% and could prove to be a worthwhile destination for a retirement fund once a passive income is required.
The FTSE 250, though, provides the capital growth potential to build a nest egg during your working life. Clearly, investing more than £10 per week could lead to a significantly greater retirement fund. However, the example serves to show that even modest amounts of capital can lead to large sums of money in the long run when compounding takes effect.
Buying FTSE 250 shares has never been more cost-effective or simpler. It is possible to open a share-dealing account in minutes, while regular investing services reduce commission costs.
Some investors, of course, may be able to outperform the FTSE 250’s long-term returns through buying undervalued companies. Since the index currently trades below its record high and investor uncertainty has been building over recent years, now could prove to be the right time to start building your nest egg with FTSE 250 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.