Should You Include Crypto In Your Retirement Plan?
Should You Include Crypto In Your Retirement Plan?

Should You Include Crypto In Your Retirement Plan?

Published Jul 13, 2023Updated Dec 11, 2023


  • Cryptocurrencies like bitcoin and ether have shown impressive historical performance as an asset, beating the performance of gold, stocks, and real estate by a huge margin over a decade.

  • While past performance isn't indicative of future results, investors believe that cryptocurrencies could play a critical role in a diversified retirement portfolio, offering the potential for high returns and a hedge for inflation. 

  • When planning your retirement, it’s critical to think about the fixed supply of bitcoin, ether’s decreasing supply in an environment of high inflation, expansionary monetary supplies, and your local currency’s long-term stability. 

Setting Up Your Retirement Goals

Setting up a retirement target depends on various factors and your target may differ significantly from others. But generally, you can use this simple calculation to come up with a rough estimate. 

First, estimate your yearly living expenses during retirement. You generally need about 70% to 80% of your pre-retirement income to maintain your lifestyle. If you currently earn $100,000 annually, plan for $70,000 to $80,000 per year in retirement.

Next, estimate your potential post-retirement income including pensions, rental income, interests, and dividends. We’ll call this annual post-retirement income.

Lastly, determine the number of years you expect to live in retirement. It’s common to use the average lifespan in your country but it’s recommended to add a few more years to this number. If you plan to retire at the age of 65 and your country’s lifespan is 80 years, then you’d need to live in retirement for 15 years. 

To calculate your total retirement target, use this formula: 

(Annual retirement expenses - annual post-retirement income) * years in retirement 

For example, if you need $80,000 per year, expect $30,000 annually from your post-retirement income, and plan for 30 years of retirement, you'd need $1.5 million in retirement savings: 

($80,000-$30,000) X 30 = $1,500,000

Of course, these are rough estimates. You can always try to come up with more customized retirement targets to fit your specific needs and lifestyle goals. 

How Did Crypto Perform in the Past?

Crypto has shown impressive historical performance, especially the leading coins, Bitcoin (BTC) and Ethereum (ETH). 

Bitcoin, launched in 2009, is the first and most valuable cryptocurrency. If you invested $100 in bitcoin in July 2010, when the price was around $0.06, it would be worth around $50 million as of mid-2023. That’s a total return of 49,999,900% over a 13-year span! 

Ethereum, launched in 2015, introduced the world to smart contracts and decentralized applications. If you had invested $100 in Ethereum during its initial coin offering (ICO) in 2014 at $0.31 per coin, your portfolio would be worth around $580,644 in total as of mid-2023 when ether is worth around $1,800. 

But these extraordinary long-term performance is coupled with extreme volatility. If we look at bitcoin’s yearly returns, you’d see that its prices increased 5,500% in one year and dropped more than 80% in another. 

But there are a couple of key takeaways looking at the two leading cryptocurrencies’ past performances. One is that the longer you stay invested, the higher the returns you’d have gotten. Using 2021 as a benchmark, if you had stayed invested in bitcoin for one year, your return would be 59%, versus 1,133% for three years, 4,686% for five years, and 876,509% for ten years. 

Another critical insight is that crypto, and bitcoin in particular, outperformed most other assets by a huge margin. For instance, bitcoin outperformed gold. Bitcoin has an average annual return of 1,576% and a total return of 18,912% from 2010 to 2021 (bitcoin prices were extremely volatile during the first year after its launch, which is why the long-term return numbers differ significantly depending on which price one uses for 2010 as a benchmark), while SPDR Gold Shares had an average return of 5% and a total return of 62%. 

Bitcoin has also outperformed stocks. Using the S&P 500 index as a benchmark, investing $100 in the index in 2010 would yield an average annual return of 15% and a total return of 412% until 2021. Even compared to some of the best-performing single stocks like Apple and Amazon, Bitcoin beat them by a significant margin. Apple and Amazon would have given you a total return of 399% and 427% during the same period. Bitcoin outperformed real estate too, as the Vanguard Real Estate ETF  had an average annual return of 14% and a total return of 162% over the same time frame. 

While past performance isn't indicative of future results, cryptocurrencies, especially established and prominent coins like bitcoin and ether, have exhibited exceptional long-term returns despite price volatility. 

Understanding Monetary Policy and Inflation

When we examined the past performance of crypto, gold, stocks, and real estate in the previous section, we didn’t factor in inflation. Inflation is a sustained increase in the price level of goods in an economy over a period. Inflation reduces the purchasing power of money, meaning your money loses its value over time. That’s why inflation is a key factor to consider when planning for retirement. 

Several factors contribute to inflation, one of the most significant factors is the government's power to print money at its discretion. This increases the supply of money. If the amount of products remains unchanged but the amount of money increases, the price of the products would naturally increase. 

One thing to keep in mind is that the world’s major central banks have printed unprecedented amounts of money in the tens of trillions of dollars since the Global Financial Crisis in 2008. Core inflation in the U.S. averaged 4.48% per year between 2020 and 2023 for an inflation total of 14.04%. That means your 15% average annual return in the S&P 500 index would only be 10% after factoring in inflation. 

Of course, in many other countries, inflation is much higher. This means your investment returns could be much lower after factoring in inflation. In extreme cases, monthly inflation is as high as 50% or more in countries like Argentina and Zimbabwe. Such a scenario is called hyperinflation, which usually brings economic havoc. 

Cryptocurrencies like bitcoin and ether have distinctively different dynamics. Satoshi Nakamoto, Bitcoin's mysterious creator, set the total supply of bitcoins to a hard cap of 21 million coins. New bitcoins are created at a decreasing rate, going through a “halving” event roughly every four years. Given its finite and deflationary supply, Bitcoin is often likened to 'digital gold.' Similar to gold, Bitcoin is seen as a store of value, a hedge against inflation, and an asset distinct from traditional financial markets. 

Similarly, ether is increasingly being considered a deflationary cryptocurrency since its transition from Proof of Work (PoW) to Proof of Stake (PoS) consensus mechanism in 2022. Even though ether had been an inflationary crypto at its inception, the native coin of Ethereum is seeing more ether burned than the number of coins entering circulation for most of 2023. This is largely due to an upgrade called EIP-1559 implemented in 2021 that burns transaction fees instead of rewarding them to the network’s miners. 

When you plan your retirement, it’s critical to think about the fixed supply of bitcoin and ether’s decreasing supply. There are also other cryptocurrencies that have similar characteristics. Particularly, you need to consider inflation, your country’s monetary supply, and your local currency’s long-term stability. 

While it’s almost impossible to predict the future performance of crypto, these fundamentals should provide some guidance. Other factors that could impact crypto’s future performance include the rate of adoption of cryptocurrencies, regulation, and taxes. 

How Much of Your Retirement Funds Should You Allocate to Crypto?

You should remain careful in your approach when adding crypto to your retirement pot,  considering all the risk factors and your own risk tolerance. Cryptocurrencies are highly volatile and can be risky, so they should only form a small portion of a diversified portfolio.

A recommended starting point could be allocating around 5% to 10% of your retirement portfolio to crypto. However, the right allocation depends on your risk tolerance, investment horizon, financial situation, and investment goals.

You should also adhere to a critical investment principle: diversification. You should invest across various asset classes including stocks, bonds, cash, real estate, and gold. It’s recommended that you diversify within your crypto investments too. Don't put all your crypto holdings into one coin only.  

There are tens of thousands of cryptocurrencies, how do you choose which crypto is right for you? Remember, not all of them are suitable for long-term investing. For retirement purposes, it's generally best to focus on established, large-cap cryptocurrencies like bitcoin and ether. If you want exposure to higher-risk assets that have the potential to offer higher returns, consider smaller, promising cryptocurrencies and only invest money that you’re prepared to lose. 

How to Build Your Crypto Retirement Portfolio

Consistency is key when building a retirement portfolio, especially when you’re investing over decades. A common strategy is Dollar Cost Averaging, commonly referred to as DCA. 

With DCA, you invest a fixed amount regularly, regardless of the price. For example, you can invest $500 every month in bitcoin for the next 10 years. This could potentially mitigate the effects of short-term volatility and reduces the risk of making large investments at inopportune times. 

When deploying a DCA strategy, always refrain from panic buying or panic selling during market upswings and downswings. You must follow your long-term plan meticulously and stay focused. Patience and discipline are vital in this strategy. 

While it’s never a good idea to time the market, it’s sensible to be cautious when prices are reaching new all-time highs and to be greedy when prices are near the lowest point. As the old saying goes:  Be fearful when others are greedy, and greedy when others are fearful. 

Benefits of Incorporating Crypto in Your Retirement Plans

There are benefits and disadvantages to incorporating crypto in your retirement plans. The benefits include: 

  1. Potential for high returns

Cryptocurrencies have the potential for high returns compared to traditional assets according to their past performance. Remember that past performances are no guarantee of future returns. 

  1. Diversification

Cryptocurrencies make up a new asset class that doesn't move completely in tandem with traditional markets. There is a limited amount of data as crypto is still new and the relationship between crypto and traditional assets continues to be debatable.  

  1. Inflation hedge

Cryptocurrencies like bitcoin can act as a hedge against inflation. Please note, however, that the history of bitcoin as an asset is short since its birth in 2009. Some point out that the global monetary conditions have been loose for most of the existence of crypto. Therefore, the evidence of this claim is not conclusive. 

Risks of Incorporating Crypto in Your Retirement Plans

The drawbacks of investing in crypto in your retirement plans include the following:

  1. Volatility

Cryptocurrencies can experience severe price fluctuations. If you cannot tolerate such volatility, crypto may not be for you. 

  1. Regulatory risk

Cryptocurrencies face uncertain regulatory landscapes worldwide. You must ensure you understand the regulation and laws in your jurisdiction and internationally to make sure you are compliant with all necessary regulations. 

  1. Lack of consumer protections

Unlike traditional retirement accounts, if your crypto is stolen, it’s often gone for good. Regulations of the crypto market are still being formulated in some countries and investors in crypto may not have the same level of protection as in traditional markets. 

  1. Taxes may be complex 

Cryptocurrencies are taxed differently in each country, but it’s generally quite complex to figure out how you should consider tax factors when planning for retirement. Sometimes, such regulations may not have been put in place, presenting significant uncertainties. 

Closing Thoughts 

You may be planning for your retirement in 30 to 40 years, or you are approaching retirement in the next few years. While the two cases are vastly different with distinct time horizons, crypto could still be worthwhile to both retirement plans. When inflation is on the rise and your money’s purchasing power is being eroded at a faster rate than expected, an asset with scarcity offers unique value.  

Even though the case of incorporating crypto in your retirement plan is a solid one, you still need to be cautious. Do it with the principle of diversification and consistency. Thoroughly evaluate your risk tolerance and retirement target and conduct detailed research on any crypto you’d like to put money in. Once you do risk management properly, a retirement plan with crypto in it could protect your financial well-being in your golden years.

Further Reading

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