In recent years, cryptocurrencies have increased in popularity among the general public. It has even led some to believe that they are a suitable retirement investment. In fact, approximately one-third of investors under the age of 55 want to rely on cryptocurrencies throughout retirement, according to the 2022 Investopedia Financial Literacy Survey.
- Given the volatility of the cryptocurrency market, this may appear to be a hazardous strategy, and it is.
- Early in 2022, the luna stablecoin on the Terra blockchain was destroyed, wiping out more than $17 billion in cryptocurrency value.
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| Do Investors Need to Hold Crypto in Retirement Accounts? |
In a handful of days, the coin's price plummeted from $116 to a fraction of a cent, making it one of the most catastrophic cryptos collapses on record. This is due, in part, to the fact that cryptocurrency is not legal cash backed by the United States government, and hence is not insured by the Federal Deposit Insurance Corporation (FDIC).
The United States Department of Labor has cautioned the retirement sector to use "extreme caution" when investing in cryptocurrency, citing the Employee Retirement Income Security Act (ERISA), which requires plan fiduciaries to preserve people's retirement resources. However, some people are more risk averse than others, and established businesses like Fidelity Investments are taking note.
Fidelity Investments, the nation's largest retirement plan provider, was the first to include Bitcoin as an investment option in its 401(k) plans this year. Investors will be able to commit up to 20% of their retirement savings to bitcoin under their scheme. However, each fiduciary is free to set their own employee contribution and allocation caps.
But just because it's feasible to invest in security like a cryptocurrency for retirement doesn't mean it's a smart move.
Is Bitcoin a Safe Long-Term Investment?
With the introduction of Bitcoin in 2009, the modern era of cryptocurrencies began. Since then, Bitcoin has had a mean yearly return of 93.8%, which is rather outstanding over time, but it doesn't imply there haven't been setbacks. The return in 2018 was -72.6%. While early investors who hung on saw tremendous gains, not all currencies fared as well. Investors have had varied outcomes, to say the least, with hundreds of cryptocurrencies to select from.
Nonetheless, crypto topped the list of greatest projected returns among people aged 18 to 55 in the 2022 Investopedia Financial Literacy Survey. 30% of millennials believe that cryptocurrency returns will surpass those of mutual funds, equities, and real estate.
The passage of time, however, will determine whether or not such hopes are justified. For the time being, it is too early to tell if bitcoin will be a solid long-term investment. Most investors under the age of 55 are further away from retirement than any cryptocurrency is. When you consider that the same investors who expect high returns don't fully comprehend where they want to put their money, it's easy to get concerned.
Markets for cryptocurrencies can exhibit ups and downs and exhibit patterns akin to stock markets. However, a bear market or a crypto winter might have long-term consequences.
According to Investopedia's poll, more than 40% of respondents across all age categories believe bitcoin is too hazardous or unclear. 44% of millennials believe bitcoin is too complicated or hazardous for their money. Meanwhile, 58% of baby boomers believe bitcoin is too complicated. Only 5% of baby boomers and 3% of millennials said they could explain how bitcoins function.
Cryptocurrencies are therefore both a unique and occasionally fashionable new asset class, as well as being incredibly dangerous and unpredictable. Before relying on cryptocurrency for retirement planning, you should think again and talk with a financial expert.
When Choosing Retirement Investments, What Should You Look For?
Consider a number of crucial considerations when you construct your retirement portfolio, including:
- Predicted growth rate: The expected growth rate is an essential investing element. Various valuation methods are used by the stock market and bond investors to forecast growth. This is more difficult with cryptocurrency.
- Volatility and risk: Stock and bond markets both contain decades of historical data and risk-mapping tools. Cryptocurrencies are not just riskier and more volatile than equities or bonds, but assessing their risk is also more difficult. There are just a few models available for measuring bitcoin risk.
- Cash flow: Many investments provide consistent cash flow in the form of dividends, bond coupon payments, and other kinds of cash flow. Because of staking and yield farming, numerous cryptocurrencies outperform more traditional investments in this area. However, it is feasible that when a person retires in 10 to 20 years, these updated technologies will no longer perform in the same manner.
For additional help creating the best retirement plan for you, order a copy of Investopedia's Retirement Guide in print.
It goes without saying that something isn't always a negative investment just because it's new and unproven. Investors have the last say in where to invest their money, so they should always examine the advantages and drawbacks before making a choice.
How to Create a Solid Retirement Plan
What is an investor's acceptable investment amount? It is determined by a variety of circumstances. First, determine your retirement financial requirements. Establish the distribution of contributions and investments required to get there after that.
For the ordinary investor, traditional investing strategies concentrated on a mix of equities and bonds to achieve this aim, frequently placing a significant emphasis on tax-advantaged 401(k) plans and individual retirement accounts (IRAs). Aside from crypto-specific and totally self-directed regular and Roth IRAs, several traditional brokerage firms are beginning to incorporate bitcoin into standard retirement accounts.
So, if you're certain that this is the road you want to take, get the advice of a financial counselor before investing your money in such a dangerous product.
Retirement funds are undoubtedly the most essential investments in anyone's life. And if you go big on crypto—or if you solely invest in cryptocurrencies for retirement—and that asset class goes bust, as we've seen in recent crypto winters—you may be forced to reevaluate your present or future goals with little warning.
Where Does Crypto Fit Into Your Investment Strategy?
Many investors should avoid integrating bitcoin into their retirement savings entirely due to the danger, volatility, and difficulties projecting the future of cryptocurrency. If you decide to incorporate cryptocurrencies, it may be best to maintain them as a smaller component of your entire portfolio.
You could be better off keeping bitcoin as a very modest piece of your entire portfolio and out of your retirement unless you're a big believer in it and want to take advantage of the tax benefits of a cryptocurrency IRA.
The majority of your retirement assets should be kept in the stock market, particularly in low-fee, varied exchange-traded funds, according to several investing gurus (ETFs). High-risk alternative investments are still permissible, but only for a percentage of your investments that are not crucial to your future livelihood.
Is Bitcoin suitable for retirement planning?
Although cryptocurrencies are popular these days, putting bitcoins into a 401(k) is a novel concept. Fidelity Investments has stated that by the middle of 2022, it would begin offering bitcoin investment choices in its 401(k) programs.
Consider this possibility while developing your bitcoin investing plan. If you put $5,000 in bitcoin and it increased by ten percent, you would have $50,000. That's a fantastic return. But would it be enough to derail your retirement plans if they dropped to zero? Most likely not.
Your investment portfolio, risk tolerance, and financial objectives are particular to you, even though the $5,000 example applies to several people or households.
You can decide on the best allocation for your retirement portfolio and other assets if you understand your investments and how each asset operates. Cryptocurrency might fit within either of those investing methods. However, if you want to rely on assets for retirement, invest with caution.
