Generating a £1m retirement fund may seem to be impossible for many people. However, investing regularly in FTSE 250 shares could be one means of achieving it. The index has posted high returns over a sustained period of time, and its current valuation suggests that it has long-term growth potential. As such, buying a range of mid-cap shares today could be a sound move.
State Pension woes
With the State Pension currently amounting to just £8,767 per year, it is likely that many retirees will require a second income in older age. Furthermore, the age at which it starts being paid is set to rise to 67 from 2028, with further increases planned beyond that date.
Since the UK has an ageing population, it would be unsurprising for the State Pension age to rise at a fast pace over the coming decades. In addition, its annual growth rate may be lowered somewhat due to its increasing costs to the working population. This may mean that the political consensus gradually moves toward an even less generous retirement outlook for many people who are currently still working.
FTSE 250 potential
Therefore, investing regularly in FTSE 250 shares could be a shrewd move. The index has experienced a difficult period over the last few years, with risks such as Brexit seemingly weighing on its performance due to its dependence on the UK economy. However, this may mean that it now offers good value for money, with its dividend yield of over 3% being above its long-term average.
Investors may be able to obtain an annualised total return in the high-single-digits over the long run, simply from buying a range of FTSE 250 shares within their portfolio. Assuming an annualised total return of 9%, they would need to invest around £250 per month over a 40-year working life in order to accumulate a £1m portfolio by the time they retire.
Clearly, investing £250 per month may not be possible in some cases. However, the example serves to show that investing regularly in a growth index such as the FTSE 250 over a long period can lead to a generous retirement fund that reduces your dependence on the State Pension.
In the near term, the FTSE 250 may experience a period of volatility. The upcoming general election and the uncertainty surrounding Brexit may mean that investor sentiment is highly changeable, which could impact on the index’s performance. However, the FTSE 250’s track record shows that buying during uncertain periods can lead to favourable returns for long-term investors, since stock prices generally factor in possible risks through lower valuations.
As such, now could prove to be a worthwhile time to start planning for your retirement through buying FTSE 250 shares. It could help you to overcome a disappointing State Pension, and even build a seven-figure portfolio.
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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.