Does cryptocurrency belong in your retirement savings?
A significant number of Americans seem to think so. According to a recent survey conducted by NerdWallet, approximately 10% of U.S. adults with retirement accounts report holding some form of cryptocurrency. This trend is even more pronounced among younger generations, with 18% of millennials and 14% of Gen Z individuals claiming to have crypto within their retirement funds.
The performance of certain cryptocurrencies has been quite favorable recently. For instance, Bitcoin—the most prominent and valuable cryptocurrency—currently trades around $115,600, reflecting an impressive 99% increase over the past year. Additionally, integrating cryptocurrency into retirement portfolios has become increasingly accessible. Brokerage firms such as Fidelity now offer direct investments in cryptocurrencies through IRA accounts, while others like Charles Schwab provide access to cryptocurrency exchange-traded funds (ETFs). Furthermore, an executive order signed by former President Donald Trump last month has initiated the process for incorporating alternative assets like cryptocurrencies into workplace retirement plans.
However, opinions among financial experts regarding the inclusion of cryptocurrencies in retirement savings are divided, with many acknowledging the inherent risks involved. Jerry Schlichter, a founding partner at Schlichter Bogard, known for its advocacy in legal disputes over excessive 401(k) fees, recently emphasized to CNBC Make It that the primary goal for most individuals should be to establish a reliable and secure retirement strategy. He cautioned that emerging sectors like cryptocurrencies and private equity can pose considerable risks for investors for various reasons.
Evaluating the risks and rewards of cryptocurrency
The apprehension financial professionals have regarding cryptocurrencies stems from two main factors: the inherent volatility of the asset class and its relatively short historical performance. Data from iShares indicates that during the year ending January 2025, Bitcoin exhibited volatility approximately five times greater than that of the broader U.S. stock market. Additionally, Bitcoin has experienced significant downturns, recording a staggering 74% decline in 2018 and a 64% drop in 2022. Despite these setbacks, Bitcoin outperformed stocks, bonds, gold, and commodities in the other eight years of that timeframe.
It is important to recognize that past performance does not guarantee future results, a principle that applies universally to all investments. This uncertainty surrounding cryptocurrencies, particularly their lack of an extensive historical track record, often raises concerns among financial advisors. Melissa Caro, a certified financial planner and founder of My Retirement Network, noted that traditional retirement guidelines are founded on extensive historical data, which cryptocurrencies currently lack.
Guidelines for responsible cryptocurrency investment
If you share Schlichter’s belief that retirement accounts should primarily serve to safeguard your assets, you might question the appropriateness of including cryptocurrencies in your IRA or 401(k). Nevertheless, many financial experts, including those with fiduciary responsibilities to their clients, are becoming more receptive to the idea of including cryptocurrencies, provided that proper precautions are in place. Joshua Brooks, a certified financial planner and founder of Exponential Advisors, stated that while fiduciary duties remain critical, an increasing number of astute investors view Bitcoin as a compelling risk-reward opportunity at this time.
For those considering adding cryptocurrencies to their retirement portfolios, it is essential to approach this investment thoughtfully.
Understand your risk tolerance
According to Thomas Racca, who manages the personal finance management team at Navy Federal Credit Union, cryptocurrency presents significant opportunities for individuals, depending on their risk tolerance levels. Generally, investors who can withstand the potential decline of their investments tend to have higher risk tolerance. This means that they may be more inclined to retain or even increase their investment in a declining asset rather than resorting to panic selling. Younger investors, who have the luxury of time to allow their investments to recover, often exemplify this capacity for risk. Conversely, if you’re nearing retirement and plan to draw income from your portfolio soon, a significant dip in value could be more concerning. Given the historical volatility associated with cryptocurrencies, they are primarily suitable for those with a robust appetite for risk who are well-informed about their investments, according to Racca.
Conduct thorough research
Before diving into cryptocurrency investments or suggesting them to clients, both retirement savers and financial advisors should engage in comprehensive research on digital assets. Brooks emphasized that, similar to any investment, a solid conviction should be grounded in thorough investigation. Whether your interest lies in Bitcoin due to its potential as an alternative currency or in Ether for its smart contract capabilities, it is crucial to maintain a long-term investment thesis that you can periodically reassess. Failing to do so may leave you merely hoping for continued market appreciation, according to Brooks.
Avoid overextending your investments
Even if you’re confident in the long-term prospects of a particular cryptocurrency, the lack of historical data suggests that even the most optimistic investors should proceed with caution, according to Caro. She cautioned that while you might later reflect on your decisions and feel you were overly conservative, prudent retirement planning necessitates a careful approach. Financial planners typically advise allocating only a modest percentage of your portfolio to high-risk assets like cryptocurrencies. This strategy is based on the premise that a significant drawdown in this portion of your portfolio will not jeopardize your long-term financial goals. Depending on your risk tolerance, investment horizon, and other income sources, Brooks suggests limiting cryptocurrency investments to a maximum of 5% to 15% of your total portfolio, emphasizing that you should only invest what you can afford to lose completely.
