Savings accounts are often considered the be-all-end-all of retirement, but investing in ASX dividend shares could be a more shrewd move, in my opinion.
As we speak, plenty of Aussies are likely working to squirrel cash into savings accounts in a bid to fund their lives after work. However, much of that capital could be working for them instead.
Here's why I would prioritise investments – particularly in ASX dividend shares – over adding to an already healthy savings balance.
I'd prioritise buying ASX dividend shares over saving for retirement
ASX dividend shares can provide retirees with both capital gains and passive income – an often all-important part of enjoying life after work.
Capital growth potential
Quality stocks in healthy businesses are likely to post notable gains as the years go by.
Indeed, a stock that tracked the S&P/ASX 200 Index (ASX: XJO) over the 10 years ended 2021 would have posted an annual average gain of around 6.6%. And that's before considering any dividends.
That's a far better return than a basic savings account – even with recent interest rate hikes. Though, it's worth noting investments in shares bring greater risks than savings accounts, and past performance doesn't guarantee future returns.
It's also worth considering the power of compounding. Compounding means a 6.6% annual return would turn a $1,000 investment into $1,895 over the course of a decade without any intervention. That's certainly nothing to scoff at!
Passive income
ASX dividend shares can also provide a retiree with passive income.
Aussie dividend-paying companies generally pay out a portion of their profits every six months or so. All without investors lifting a finger.
Additionally, it's likely that, as a company grows, its profits will increase too. Thus, the dividends it pays to investors might increase as the years go by.
Of course, that means ASX dividend shares can be an inflation hedge. On the other hand, cash held in a savings account is particularly susceptible to inflation.
How I'd seek out ASX dividend shares for retirement
If I were seeking out ASX dividend shares to hold through my retirement, I would focus on identifying quality companies trading at decent prices.
Quality is subjective, however. Personally, I would hunt down companies with a track record of steady performance, a strong financial position, and competitive advantages over their peers.
Therefore, my focus would likely be on dividend-paying ASX 200 blue-chip shares. They're generally market leaders with large market capitalisations.
Blue-chip shares may not provide the large capital gains that, say, growth shares, can offer. However, they're generally stable investments, capable of navigating the market's ups and downs with comparative ease.
Importantly, I would aim to build a diverse portfolio. That way it would be best protected from single-sector downturns.
Though, no investment is without risk, nor can any share guarantee capital returns or passive income.
