How to invest for retirement in an inflationary environment

What investments should retirees choose to manage inflation?

Smiling elderly couple looking at their superannuation account, symbolising retirement.

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Investing for retirement can be a challenging decision because we don't know how long we're going to live or what the economic environment is going to look like.

Inflation is a negative when it comes to ensuring our money can pay for all the goods and services we want. The last few years have seen costs of many items jump, making it harder for retirees to plan for the future.

The investment group IML points out that retirees seem to be left with two choices.

The first is taking greater risks with their investments to improve returns and, hopefully, stay ahead of inflation, but this may increase the possibility of losing money.

Another option is to invest conservatively, earning lower returns, and hope that inflation will come down more quickly, enabling retirees to maintain their quality of life.

But IML believes that there's a third option – investors in retirement should focus on sustainable passive income rather than returns.

Why sustainable income makes sense

IML suggests a greater focus on passive income reduces the chance that retirees will need to use their investment capital to fund their life expenditures during periods of poor investment performance.

The investment outfit suggested dividends are "inherently less volatile than share prices as dividends are paid based on the underlying profitability of the company, whereas share prices fluctuate depending on the whims of the market."

Regular income enables investors to receive cash, and they're less likely to be forced to sell their shares during a bear market, locking in losses and permanently hurting the investment balance of that portfolio. As IML points out, this is called sequencing risk.

In the accumulation phase of our lives, we are usually net buyers during bear markets rather than sellers.

This method could mean people are more likely to enjoy their retirement and be less likely to worry about their finances.

Which ASX shares can provide good dividends?

In the IML Equity Income Fund, which is the fund the investment outfit is referring to with this sustainable income strategy for retirement, these were the biggest ten holdings at 31 May 2024 and their weightings:

National Australia Bank Ltd (ASX: NAB) – 6.4%

Telstra Group Ltd (ASX: TLS) – 5.9%

BHP Group Ltd (ASX: BHP) – 5.7%

CSL Ltd (ASX: CSL) – 4.8%

Aurizon Holdings Ltd (ASX: AZJ) – 4.4%

Brambles Limited (ASX: BXB) – 4.3%

Westpac Banking Corp (ASX: WBC) – 4.3%

Steadfast Group Ltd (ASX: SDF) – 3.7%

Charter Hall Retail REIT (ASX: CQR) – 3.5%

Lottery Corporation Ltd (ASX: TLC) – 2.8%

I'd also throw in a few other ASX shares as ideas that have a long track record of growing their dividends, including Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW) and Sonic Healthcare Ltd (ASX: SHL).

Motley Fool contributor Tristan Harrison has positions in Brickworks, Sonic Healthcare, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks, CSL, Lottery, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Brickworks, Steadfast Group, Telstra Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Aurizon, CSL, and Sonic Healthcare. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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