Retirement & Cryptocurrency

What You Need to Know About Cryptocurrency and Your Retirement

Started as a small project, cryptocurrency has become a large and continuously growing part of the finance industry. These blockchain tokens are making way into retirement planning slowly. Recently, some major companies have opened their doors to cryptocurrency as an investment option. If you are considering cryptocurrency for your retirement planning, you need to know the risks that come with crypto assets.

It is no secret that the crypto ecosystem is fickle, and in retirement planning it is important to monitor and reduce risk so your assets last 20-40 years. However, cryptocurrency may offer retirees a solid diversification option.

The Newest of New Paradigm

While trends have been observed, analysists are still studying the ups and downs of the cryptocurrency ecosystem. Some experts will say that it is too risky to invest while others will say by not investing you are losing out even with the rules still being written and changing often. Cryptocurrency may offer diversification to your retirement portfolio. The risk lies within your decision to invest or not.

Market Volatility

You are likely very familiar with the success story of Bitcoin and Ethereum. Just this year alone cryptocurrencies have fluctuated significantly. In 2021, Bitcoin dropped $30,000 in value within 3-months.

New Cryptos Launched Often

There are over 13,5000 cryptocurrencies in existence. Some are considered overvalued, others undervalued, and others are predicted to be “just right” for long-term investments. But there are new cryptocurrencies added on the market daily, so when investing choose wisely.

Traditional Accounts & Crypto

Only a few plan sponsors allow for cryptocurrency to be invested in for retirement. There are options under cryptocurrency such as Bitcoin IRA or Bitcoin 401(k). You may rollover funds into a self-directed IRA that allows crypto investments if you qualify. Please note, a lot of the cryptocurrency ecosystem is not government regulated and poses greater risk than typical market stocks and investments.

Taxes & Recording

Record keeping is very important within cryptocurrency gains and losses. Within the USA, cryptocurrency is taxed the same as any other gain or losses on stock for long-term and short-term. However, the recordkeeping and reporting are not as established as with regular trade assets. It is primarily on you to keep accurate records.

The Exchanges & Brokerages

Cryptocurrency is traded on a crypto exchange mostly, but you can trade through a broker. While more expensive, brokers are often much less confusing. Purchasing directly on the exchange can get complicated fast.

At-Risk for Hacking & Theft

Unfortunately, being unregulated means cryptocurrencies are not as protected. There is a greater risk for theft and hacking. Heedless of your storage method—keep investment in the exchange, use external storage device, or store offline—there is a need to have extra precautions in place.

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How to Face Your Retirement Risks: Think in Buckets

Since the old paradigm of retirement will do more harm than good in this current world, tackling the Top Ten Risks can be tricky.

Why won’t the old paradigm work? The first reason is folks nowadays live into their 80s when decades back that was not as common. Because retirement age back in the late 20th century was 55, many retirees waited until years past their retirement age to fully leave the workforce. Another major contributor to retirement plans back then were pensions. Social Security (SS) was on the table then, too. Folks could easily retire and enjoy their golden years off their employment pension and SS. Now, a lot of retirement is unfortunately up to the employees.

Beyond understanding SS and Medicare, balancing your assets over taxable, tax-deferred, and tax-free accounts is key to the success of your risk-free retirement. This is known as the Three Bucket System.

First and foremost, the taxable bucket is designed for emergency funds. Having 6 months of your living expenses in this bucket permits less risk. You are protected in case of emergency, and you are not exposing your savings to extra taxation.

The second bucket is tax-deferred and is a bucket folks overfill. While this bucket varies individually, there are some ‘rules’ to be mindful of. Your required minimum distributions (RMDs) should be low enough to not create provisional income (too much would cause your SS to be taxed). Secondly, you do not want them to exceed your standard deduction.

Filling the other two buckets means you can successfully begin filling the third bucket up: tax-free. The sooner you do this, the better off your risk-free retirement will do. Things that can be done for this bucket are Roth conversions or buying a life insurance retirement plan.

**We strongly encourage you to listen to our podcast Retirement Risk Show episode “Break Down the Top 10 Risks Facing Your Retirement” for a deeper dive into the information provided in this blog. For even more on the 10 Risks Top Ten Risks and strategies to reduce them during retirement, register for our webinar “Getting Safely Through Retirement.”

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