Can Bitcoin Help You Retire Early?

Until this year, Bitcoin (BTC -1.02%) had been perceived primarily as a means of financial speculation and not as part of a responsible retirement strategy. But things are starting to change faster than you might think. In April, Fidelity Investments began rolling out Bitcoin investment options for employer 401(k) plans. And Congress may be gearing up to vote on a potentially groundbreaking piece of legislation called the Retirement Savings Modernization Act that could help make cryptocurrency a serious retirement option.

So Can Bitcoin Help You Retire Early? Of course, that depends on many factors, such as how much you need to save, how much risk you’re willing to take, and how long you have until retirement.

How much do you need to save?

One reason Bitcoin is so attractive as a retirement option is that there is simply no single asset class that has performed as well as Bitcoin over the past decade. If you had invested $1,000 in Bitcoin in 2013, you would have over $140,000 today. Even if you had invested a similar amount in high-risk tech stocks, there’s no way you could have matched Bitcoin’s historical returns. So you can see why many people now believe that Bitcoin can turbocharge their retirement income.

Image source: Getty Images.

Just remember that crypto is still so new as an asset class that we don’t know how it will perform over time. Yes, Bitcoin has been extraordinary over the past decade, but it has also suffered a handful of painful 50% declines along the way. For the year, Bitcoin is still down 60%, and no one knows when or if Bitcoin will reverse these losses.

Imagine what would have happened if you planned to retire in 2022 and had relied on Bitcoin as your primary source of retirement savings. Before the crypto market meltdown, you probably fantasized about retiring abroad to an exotic location. Now, 60% poorer, you might be thinking about delaying retirement altogether.

How much risk are you willing to take?

Despite this volatility, the risk-reward profile of younger investors is changing in favor of high-risk, highly speculative assets like crypto. According to a recent Bank of America private banking and wealth management, an overwhelming majority of millennials said they wanted to diversify their investment portfolios with crypto. Over 75% of investors aged 21 to 42 said it is impossible to achieve above-average returns with stocks and bonds alone.

When Fidelity announced its new Bitcoin retirement options in April, Fidelity initially set a hard cap of 20% on the percentage that investors can allocate to crypto options. For now, think of it as the absolute maximum you should ever allocate to Bitcoin for retirement savings. Moreover, Fidelity gives employers the option to lower this limit even further, primarily because of concerns that their fiduciary duty to their employees may be compromised by offering high-risk retirement options. The US Department of Labor has even weighed in on the matter, suggesting that employers should probably avoid offering crypto investment options altogether. But that can of course change if new legislation is passed.

How long do you have until retirement?

One reason people are now talking about Bitcoin as a retirement option is because their time horizons have changed. Quite simply, 50 is the new 65. People want to retire earlier than ever before, so they need a way to speed up their investment timeline. That usually means finding new high-risk, high-reward assets, and crypto is certainly a high-risk, high-reward asset. In the past, people might have been willing to invest steadily for 30 years or so, and at the end of that time period have enough to retire safely. But many do not feel that they have 30 years to wait.

This is especially true for young millennials. Maybe it’s part of the whole trend towards instant gratification in all aspects of our lives, but many young investors want their retirement money as soon as possible. From this perspective, Bitcoin can at least become a lifeline for someone who didn’t start investing in their mid-20s. It can be a way to catch up with someone who started saving earlier.

Get rid of crypto at your own risk

That said, crypto is generally considered too volatile and too speculative for a responsible retirement strategy. Even with Fidelity involved here, it might be hard to find a company that will even offer crypto options for a 401(k). That’s why many people are waiting to see what the new legislation coming out of Congress will propose. In a best-case scenario for crypto enthusiasts, Congress could amend previous legislation to make crypto an approved investment option under the Employee Retirement Income Security Act (ERISA). It will go a long way toward eventually legitimizing crypto for employers and institutional investors.

For now, it’s best to think of crypto as a way to improve your retirement, rather than a magic bullet that will help you retire early. So keep putting your money into your 401(k) or IRA, and keep looking for ways to save more and spend less. It is most likely the best way to retire early.