When it comes to saving for retirement, there’s a lot to consider. Not only do you have to define your goals and what kind of life you want to live in retirement, but you also have to consider the types of investments to include in your retirement portfolio to help you get there.
With the rise of Bitcoin ETFs, and crypto IRAs introduced by financial giants like Fidelity, you may have questions about what role crypto should have in securing your retirement — and if it should even play a role at all.
We asked certified financial planners what they’re recommending to clients these days, what you should consider before investing and why.
1. Know what you’re getting into
It’s widely known that crypto is a speculative and volatile investment. This is because the digital asset isn’t backed by actual business performance or cash flow like stocks are. In the crypto world, prices are solely based on “vibes,” or how investors feel about a certain coin. The allure of big gains can be tempting, but prices hinge on market sentiment. Understanding this is key if you’re going to consider using crypto to help fund your retirement years. Crypto prices are fast moving, and not always in a good way.
“If you’re considering buying it just because it has risen 18 percent year-to-date, you may just be chasing returns and speculating rather than investing,” says David Rosenstrock, CFP, director of financial planning and investments at Wharton Wealth Planning LLC.
Rosenstrock also says it’s important to make sure your expectations surrounding crypto are well-informed. How might crypto contribute to your financial well-being? After all, saving for something like retirement often requires a long-term financial strategy, not the get-rich-quick potential that comes with the volatility of crypto. Knowing these risks is just the beginning.
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2. Assess your risk tolerance
Your risk tolerance is how much risk you’re willing to take on when it comes to what types of assets to invest in. Everyone is different, and your risk tolerance will likely decrease as you near retirement, because you don’t want to be investing in risky assets that could dismantle your nest egg before cashing out.
If you’re younger, on the other hand, you have more time to compensate for potential losses. This allows you to consider investments that could earn a bigger profit, but also carry more risk, including crypto.
“From a risk perspective, the volatility and regulatory uncertainty of crypto puts it firmly in the speculative camp,” says Patrick Huey, CFP, owner and principal advisor of Victory Independent Planning. “Even with the arrival of ETFs and new brokerage access, retirees should treat digital currencies like a potent spice: A dash can liven up a recipe, but too much can ruin the whole meal. The core of your retirement nest egg deserves to be sturdy and time-tested.”
Take the time to consider how much risk you’re willing to take on given your long-term financial goals, and whether crypto will help you meet that goal before adding it to your retirement strategy.
3. Allocate wisely
How much crypto is too much for your retirement portfolio is going to be different for everyone, and it comes back to your risk tolerance. Some financial pros recommend 10 percent or less, some say 5 percent, some say none.
“Allocate no more than 10 percent — if that — in speculative assets, and always weigh new opportunities against your hard-earned peace of mind,” says Huey. “Markets favor the prepared and the patient, not the gambler chasing the next gold rush.”
Michael Casey, CFP, founder and president of AE Advisors, gives similar advice to his clients.
“I am an early Bitcoin adopter and one of the early CFPs to recommend allocating to this new asset class since 2019,” Casey says. “Most of my clients have an allocation of 5-10 percent Bitcoin in their portfolios.”
Everyone’s financial goals, timeline and risk tolerance are going to differ. Once you’ve determined an allocation, you can think about practical next steps.
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4. Decide how to add crypto to your retirement portfolio
Most employer retirement plans don’t offer crypto investment options. Depending on how you want to hold crypto, you may need to open a self-directed IRA.
Here’s a rundown of each option.
Individual retirement account (IRA): In a regular IRA, you can buy spot ETFs in Bitcoin and Ethereum, but you can’t hold crypto directly.
Self-directed IRA: SDIRAs let you own crypto directly alongside other alternative assets, such as real estate or precious metals. These accounts have the same contribution limits as regular IRAs. You can also open a crypto-specific SDIRA — sometimes called a Bitcoin IRA — with a custodian that specializes in crypto. You can buy crypto with a regular SDIRA though. It just depends on what investments your custodian offers.
Of course, there are other ways that you can invest in crypto, such as a brokerage or crypto exchange account, but you won’t get the tax advantages of a retirement account.
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Bottom line
Crypto may help you reach your retirement goals, but it’s best to approach crypto investing with caution and don’t bet the farm, so to speak. That is, think of crypto as a tool to reach a long-term financial goal, rather than a speculative or get-rich-quick play.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
