5 Ways Crypto Could Make or Break Your Early Retirement Dreams
Few investors use the words “cryptocurrency” and “retirement” in the same sentence. But as an asset class, it has plenty of bulls — and history hasn’t proven them wrong yet.
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If you’re crypto-curious and wonder how the notoriously volatile asset class could help you retire early, consider the following unconventional investing ideas.
Can Crypto Help You Retire Early?
Over the last decade, the price of Bitcoin has risen 13,438% (from around $488 to around $66,054). The price of Ether has risen 1,027,903% (from $0.31 to around $3,187).
The math alone proves that cryptocurrencies could help you retire early. No other asset class has even come close to these returns over the last decade.
Of course, “could” doesn’t always mean “will.”
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Is Crypto a Reliable Retirement Investment?
Cryptocurrencies come with enormous price volatility. It’s precisely what’s enabled those astronomical returns in the first place.
And volatility is one of the main measures of risk in investments. Sure, your investment could double in a week. Or it could be cut in half, or worse.
Bear in mind that cryptocurrencies don’t generate income of any kind — your returns solely rely on price growth. Without revenue, there’s no underlying value to measure, which makes them speculative investments.
No matter how bullish your feelings on crypto, you shouldn’t bet your entire financial future on it.
That doesn’t mean you can’t put any bets at all on it, however.
How To Invest in Crypto To Retire Early
If you dream of early retirement with the help of a cryptocurrency rally, keep the following tips in mind.
Know your retirement target numbers
To hit a target, you need a target to aim for.
How much do you actually need to retire early? You need to know when to cash out your coins and walk away, having bet and won.
Financial experts write entire books about calculating your retirement numbers. But as a shorthand, start with the 4% Rule. It states that if you withdraw 4% of your nest egg in the first year of retirement, and adjust your withdrawals for inflation thereafter, your nest egg should last at least 30 years.
Granted, when you retire early, you likely want your nest egg to last longer than 30 years. Financial planner Michael Kitces ran the numbers and found that a 3.5% withdrawal rate should leave your nest egg intact forever, at least based on historical performance.
Divide 100% by a 3.5% withdrawal rate, and that leaves you with a multiplier of 28.6. Multiply your target annual spending in retirement by 28.6, and you arrive at a rough target for your retirement nest egg.
Set profit targets
If you set $1 million as your retirement nest egg goal, and your cryptocurrencies surge upward and push you over your target, capitalize by selling.
Given crypto’s volatility, the bottom could drop out tomorrow. Make sure you set profit targets to sell your coins if they pass your hard thresholds, because if the history of crypto has taught us nothing else, it’s that the good times come and go lightning-fast.
Focus on feasible ‘real use’ coins
You can’t actually shop at too many stores with Bitcoin or Ether at the moment, but that could change — and appears to be doing so. It’s conceivable that “established” crypto may become a more common way to send or spend money in the future.
Other, more obscure coins have less chance of going mainstream.
Balance your crypto wallet and portfolio based on the likelihood of practical real-world use. Ultimately, that’s what could drive a coin’s value through the roof: widespread use as a legitimate currency.
Limit exposure to crypto
Given the high volatility and risk, cryptocurrencies should only make up a small percentage of your portfolio.
Risk only what you can afford to lose, if every coin dropped to $0 tomorrow.
Balance crypto with more traditional assets
Invest in stocks, bonds, and possibly real estate to keep your total portfolio diversified and likely to succeed.
Buy index fund ETFs. Use a robo-advisor service (some of which are free). Consider annuities as a hedge.
It sounds like boring advice — but investing is supposed to be boring.
Final Thoughts
Cryptocurrencies could push your portfolio past your threshold for retiring early. Or they could prove entirely worthless in a year from now.
If you don’t mind risk, consider setting aside a certain (small) percentage of your portfolio in crypto. But balance out the risk in that sector with more traditional assets to make sure you don’t find yourself penniless in your pensioner years.
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This article originally appeared on GOBankingRates.com: 5 Ways Crypto Could Make or Break Your Early Retirement Dreams
