Can Bitcoin Help You Retire Early?

It’s a simple question. Each Bitcoin (BTC -0.26%) the investor must have given it at least a passing thought. Can this newfangled digital currency give me enough money to allow me to retire early?

Unfortunately, I can’t share a simple yes-or-no answer with you. In reality, the correct answer in your specific situation must lie somewhere between “I don’t know” and “it depends.”

However, we can take a look at some of the most important factors that can lead to a more concrete solution for your personal situation. Let’s put on our thinking caps.

Image source: Getty Images.

1. Let’s set a reasonable goal

The standard retirement age for Americans is between 65 and 67, depending on the year you were born. The sliding scale determines when you can start collecting full benefits from Social Security, but you can also request those checks a few years early — at a reduced cost. If you were born in 1960 or later, you can retire as early as 62, but then you will have to reduce your social security payments by 30%.

So the real question we’re asking here is, will bitcoin help me cover the gaping 30% gap in my Social Security benefits so I can retire comfortably five years early?

2. Time is your best friend

The younger you are, the more you can do to ensure a comfortable retirement. Let me show you the power of compounding returns on your investment over long periods of time. You can play along at home with a handy Foolish calculator. Below I will use the one called “What can my savings grow into?”

Imagine you started from scratch, saving $100 per month for your retirement in a simple investment account with an average annual return of 8%. We leave the tax bracket at the standard level of 22%. Results will be modest at first, increasing dramatically later. After the first 10 years, you’ll have $16,995 in your retirement savings account. After 20 years, the total value should rise to $48,125. And if you keep this up for 30 years, you’ll have $105,151 in your pocket.

That’s not too bad for a total 30-year investment of $36,000. The effective return on your invested cash lands at 42% after one decade, 100% ten years later, and 192% at the thirty-year mark.

Remember, the compound average growth rate (CAGR) remains the same at 3.54%. The magic of money magic lies in putting your money to work for a long time, so that you get additional profit on top of the investment returns you have already earned. This effect really increases over time.

So if you’re just a decade away from the early retirement age you wanted, you’ll be earning a much larger annual return on your investments than someone who started saving in their 20s. Sorry, but I don’t make the rules. It’s just math.

3. Bitcoin can help

There is a small problem with the idea of ​​using Bitcoin to repair a 30% shortfall in your retirement savings. Diversification is an important and useful investment tool, and it is not particularly healthy to allocate 30% of your pension portfolio to a single asset. The exception to this rule would be when you own inherently different assets as one S&P 500 index fund. Bitcoin does not fit that description.

However, a more sensible Bitcoin allocation could arguably outgrow your other investments and reach a 30% portfolio share the hard way – by delivering superior investment returns over the years.

How hard would that be? Again, it depends on how much time you have.

So let’s say we have a $100,000 portfolio to manage. You bought $5,000 in Bitcoin, which is about 0.3 digital coins at current prices. The rest is invested in a low-risk mix of shares, which gives a modest but stable return of 8% per year regardless of market conditions. How high does Bitcoin’s annual CAGR need to be if you need it to make up 30% of the total portfolio after a certain number of years?

We are not adding new money to this hypothetical investment account. Tax rates don’t matter either, as they apply equally to both Bitcoin and non-Bitcoin investments (assuming cryptocurrency taxation regulations treat Bitcoin as a stock decades from now). I have a solution, but it only works if we assume a spherical cow.

• If you have 40 years to work with, you could be working on a 13.9% annual return on your Bitcoin investment.
• To get there in 30 years, you’d need a Bitcoin CAGR of about 16%.
• All you have is two decades? Ok, then you need an annual Bitcoin return of 20%.
• And when you really want to retire at 62, but you’ve already celebrated your 52nd birthday, Bitcoin would have to do some heavy lifting. Here, the annual return requirement would rise to 33.5%.

4. There are no guarantees

Can it be done? Oh, sure – Bitcoin has posted average annual growth well over 30% over the years. If you bought a Bitcoin for $0.09 way back in 2010 and held it at today’s price of roughly $16,635, that’s an incredible CAGR of 154%.

But the largest and oldest cryptocurrency is also notoriously volatile. Single-year returns along the way have ranged from 5,571% in 2014 to a 72% loss in 2019. Bitcoin has taken a 65% haircut in 2022, underscoring the risky side of this digital coin.

So it’s entirely possible that you could squeeze an average annual return of 33.5% out of your initially modest Bitcoin allocation, but you certainly shouldn’t bet the farm on it. The good years can be wonderful, but the bad years can also do serious damage to your retirement plans.

Will Bitcoin Let Me Retire Early?

In the end, the short answer is that you shouldn’t rely on Bitcoin alone to fill a 30% gap in your Social Security payments. Furthermore, Bitcoin does not pay dividends and you cannot earn percentage-based rewards for staking it, as you can with alternative cryptos such as Ethereum (ETH -0.58%) and Cardano (ADA -0.72%). On the other hand, the staking compatible cryptos tend to carry even more volatile price tags than Bitcoin. There is no such thing as a free lunch.

So you can include a small portion of Bitcoin in your retirement portfolio, but the results can vary wildly from year to year. You should view your Bitcoin returns (and other crypto investments) as a speculative bonus on top of your basic retirement savings strategy. And if you really want to retire early, you’ll need to make up the difference in Social Security payments by saving a few extra dollars along the way. Again, let time work its magic on your investable assets.