Since the State Pension currently amounts to just £8,767 per year, it’s likely many retirees will require a supplementary income in older age. Furthermore, with the State Pension age expected to move to 68 over the next couple of decades, building a nest egg could become a necessity for anyone who’s seeking to retire at the age of 65 or under.
One means of achieving that goal is to invest in FTSE 250 shares. Although the index is often viewed as UK-focused, it also offers significant international growth prospects. At a time when it appears to trade on a low valuation, it could offer a variety of high-quality businesses trading at low prices through which to improve your portfolio returns.
Certainly, the FTSE 250 is a more UK-focused index than the FTSE 100. While the large-cap index generates around 30% of its income from within the UK, that figure is around 50% for the FTSE 250.
However, the mid-cap index still obtains half of its revenue from outside of the UK. This means it may be better-positioned than many investors realise to capitalise on the growth prospects that economies such as China and India provide over the long run. This could act as a catalyst on the index’s performance and allow its members to generate higher returns — while also offering a more favourable risk profile — over the long run.
Since mid-cap shares have historically been faster-growing opportunities than their larger peers, the FTSE 250 could deliver a higher rate of capital growth than its bigger brother. Smaller businesses generally have greater room to grow within their respective markets, which could lead to a faster pace of capital growth than more mature, larger businesses that find it difficult to obtain a high rate of return on reinvested capital.
In addition, the FTSE 250’s higher exposure towards the UK economy may mean there are better value opportunities on offer than in the FTSE 100. Investors may be adopting a cautious stance towards the UK at a time when Brexit-related risks are high. This could mean there’s high volatility in the short run, alongside scope for capital growth in the long run.
Over the last decade, the FTSE 250 has delivered an annualised total return of around 11%. Although such a high rate of growth may or may not be achievable over the long run, it serves to show the mid-cap index offers significant capital growth potential. As such, it may be appealing to investors who are seeking to build a nest egg over a long time period, and for whom short-term volatility is not a major concern.
While the FTSE 100 may be a more popular index than the FTSE 250, the latter could be more effective at helping you to overcome a disappointing State Pension in order to retire early.
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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.