Millennials and Gen Zs: Should They Rely on Crypto for Retirement? Building a Portfolio Balancing Growth and Security

Cryptocurrency has become an increasingly popular investment vehicle for American retirement savers willing to leverage new market opportunities while simultaneously bolstering their retirement funds.

For many young people, this provides them with the chance to gain a head start on their savings. Several reports from recent years show that younger generations are falling behind on their retirement savings as costs continue to climb and interest rates remain historically high.

For instance, 25 percent of Generation Z — the oldest of which will turn 26 this year — haven’t started saving anything for retirement. Keeping in mind that the majority of these savers are relatively new to the labor market, there is the possibility that they will begin saving in due course.

Similarly, in a different report, 47 percent of Gen Zers claimed to have a retirement plan, either a 401(k) or 403 (b). Compared to Millennials, the cohort born between 1985 and 1996, 75 percent said they already have some retirement plan in place.

With most American adults contributing to a retirement plan, younger generations are looking to surge past previous generations in terms of retirement savings, and many are hoping that crypto could be the answer they’re looking for.

How young Americans are investing in cryptocurrencies

In the U.S., there is a strong generational disparity considering how people are currently diversifying their retirement savings.

Older cohorts such as Gen X and Baby Boomers, many of whom have started to step into retirement in recent years, are complacent about directing their capital towards traditional investment vehicles such as stocks, bonds, mutual funds, and Exchange-Traded Funds (ETFs).

Although younger people are doing the same, many are considering crypto as a way to supercharge their retirement savings, especially for those who have had a late start.

One poll found that Millennials (43 percent) were most likely to invest in crypto. Generation Z (22 percent) and Generation X (23 percent) followed closely behind, with only eight percent of Baby Boomers likely to invest or hold cryptocurrencies.

That being said, the young and wealthy are following the same path. Seventy-five percent of wealthy young people claimed that traditional investments such as stocks or index funds could no longer provide them with above-average returns. Nearly a third of wealthy young people said that crypto could provide them with an opportunity to build wealth for the long term.

Compared to their older peers, Millennials and Gen Zers are more comfortable with taking the risk of investing in cryptocurrencies, whether to build wealth or potentially include these investments in retirement planning.

This is clear in another study which revealed that one in four American Millennials say that they now rely on cryptocurrency to help fund their retirement. Not surprisingly, the majority of Gen Z respondents — 53 percent — expect to stop working before 60, with over 17 percent saying that crypto will fund their retirement.

There’s no denying that cryptocurrencies have quickly become an important and potentially essential part of younger savers’ retirement planning.
Building realistic retirement goals
Planning specific retirement goals through crypto diversification can help you better understand future circumstances while keeping certain considerations in mind while setting up the type of retirement you want to have one day.

Your standard of living

There are specific necessities that may be important to include in your retirement planning, however, when looking deeper, you need to consider additional things you would like to have to continue living a more comfortable life. For instance, taking a vacation abroad several times a year or moving to a new part of the country are all things that will help maintain or improve your standard of living.

Estimated monthly and annual expenses

As we’ve seen in recent years, the cost of living remains elevated, and experts project that this trend will continue for the foreseeable future. Considering your current monthly or annual expenses will give you an idea of how much money you will need to stock away to continue living a relatively comfortable life. These aren’t easy calculations to make. However, it’s best to determine your current expenses, including taxes, and find an estimate.

Realistic monthly income expectations

Once you decide to retire, your steady-paying job will no longer be able to support you or your cost of living. These are essential things to think about, and by the time you retire, you want to be assured that the monthly income you’ll receive from your retirement savings can cover all your necessary expenses and additional costs or emergencies.

Estimated savings

If you haven’t already started putting away some of your income each month, either in a high-yield savings account, retirement fund, or self-directed retirement account, you should begin planning how much you need to sock away each month to reach your retirement goals. Every person will have a different retirement savings goal, and it’s vital to keep this at hand when making the necessary arrangements or consulting with a financial advisor.

Investing in crypto with a 401(k)

For many individuals willing to invest in cryptocurrencies, doing so is often more complicated than imagined due to the limited number of retirement accounts that allow or permit crypto-based investing.

For instance, some retirement savers look at investing in crypto through their 401(k) retirement plan. However, these are standard accounts that often provide individuals with a limited number of options, aiming to offer savers the basic options with a maximum typical return.

A 401(k) plan is usually one of the best incentive drivers, especially for young people looking to start saving and thinking about their long-term goals. An employer-sponsored 401(k) plan provides many individuals the access they require to start directing capital toward their senior years’ savings.

Despite their popularity and availability, with 79 percent of Gen Z employees having company-sponsored 401(k) accounts, investing in cryptocurrency or an affiliated investment is limited due to the structure or nature of each account.

Investing in crypto as part of retirement savings can be done through a Fidelity Digital Assets Account, which has been designed to allow employees to include Bitcoin as part of their core investments.

The downside, however, is that a handful of employers only offer the Fidelity DAA account. Additionally, some crypto-based options can be limited for more experienced savers willing to leverage cryptocurrency-focused investments.

On the bright side, blockchain technology trends this year indicate the possibility of an Ethereum ETF, which could help provide savers with a wider selection of crypto securities and further complement existing BTC ETFs that were approved by the SEC earlier this year.

Investing in crypto with an IRA

An Individual Retirement Account or IRA is a type of retirement savings or pension account that allows individuals to purchase investment assets using their taxable income. These accounts offer some agility in terms of the type of assets a person can include, however, options in terms of crypto or crypto-based assets are still fairly limited.

Unlike a standard 401(k), these accounts are funded by individuals, and they can choose the type of assets to invest. Fortunately, those looking to have more legroom to decide on their assets can opt for a self-directed IRA or SDIRA.

Investing in crypto with an SDIRA

A self-directed retirement investment account can give a person more options to choose from; however, the complication with these accounts is that they are still managed by an institutional broker.

This type of account is similar to an IRA, with the only difference being that a person can make most of the investment decisions by themselves, including security purchases or the level of compensation, and it allows you to hold investment options often not included with an IRA.

Apart from standard security options such as stocks, bonds, index and mutual funds, and ETFs, additional asset vehicles include foreign currency, real estate, a few commodity options, or a shortlist of investment options such as crypto, life insurance policies, or loans.

For young individuals looking to invest in some form of cryptocurrency or at least include crypto as part of their retirement portfolio, an SDIRA could be the most convenient option, although it’s important to be informed about potential shortcomings.

Currently, two types of SDIRA accounts allow you to purchase crypto:

Bitcoin IRA: This allows individuals to choose from roughly 60 different cryptocurrencies. However, there is a minimum investment requirement of roughly $3,000. Additionally, you can open a Bitcoin 401(k) or Bitcoin Roth IRA.

Alto CryptoIRA: This is another type of SDIRA that allows you to purchase cryptocurrencies facilitated by Coinabse. Opening an account is relatively easy. However, this account is similar to a standard crypto brokerage account, with few tax benefits.

Your decision to open a crypt-focused retirement account depends on your financial situation and risk comfort. Additionally, buying crypto in your retirement account can mean you must comply with several regulatory conditions to remain tax compliant.

Benefits of buying crypto in a conventional retirement account

While it’s possible to purchase crypto in a retirement account, knowing the possible benefits could help shed more light on the opportunity and help you better understand whether you are in a position to undertake such risks.

Retirement portfolio diversification

As a general rule, many experts suggest that individuals who still have a long time to go before they retire can allocate anywhere between 5% and 10% of their investment portfolio to cryptocurrencies. Older individuals nearing retirement are advised to scale back on these activities to help minimize their risk and exposure to crypto volatility.

However, it’s good to mention that crypto can diversify your portfolio, allowing you to access new capital markets and take advantage of current growth. Crypto has seen tremendous improvement since the start of the year, and this can be valuable for your retirement savings.

Tax advantages

Opening a Crypto IRA will enable you to take better advantage of various tax benefits, which are often enjoyed by traditional Roth IRA accounts. The rules state that as long as your cryptocurrencies remain in your account and are not sold for profit, your crypto will not be taxable or tax-liable.

Keeping your cryptocurrencies in a designated account, such as a Crypto IRA or Roth Crypto IRA, allows you to leverage the tax benefits for as long as possible and the potential of staking your assets to gain interest.

Return on investment

While you shouldn’t ignore the importance of holding such a volatile asset, crypto performance has experienced a major upside in recent months. Bitcoin (BTC) is the largest of all cryptos, seeing a price improvement of more than 50 percent since the beginning of 2024. Similarly, Ethereum (ETH), the second-largest cryptocurrency on the market, has improved by roughly 40 percent in the same period.

Despite the harsh price swings these digital assets experience, smart savers and savvy investors might have the potential to leverage these securities’ high return on investment, which can significantly boost their retirement accounts.

Account options

Adding cryptocurrencies to your retirement savings account is still somewhat challenging, seeing that it’s impossible to buy crypto and add it to your retirement accounts simply. Instead, it’s likely to open a separate crypto-focused retirement account that will provide you with the same benefits as traditional accounts.

This would allow you to purchase cryptocurrencies separately from your core retirement savings, minimizing your risk exposure while still having the ability to buy, sell, or trade crypto. Although standard IRAs and Roth IRAs are not yet equipped to provide individuals with crypto options, you can still access these options through a designated account.

Risks of buying crypto in a conventional retirement account

Buying crypto isn’t all about taking advantage of the magnificent returns a person can make. There are multiple risk factors that each person should be aware of, and this includes young individuals who still have several years before retirement to make up for any losses.

Crypto volatility

Cryptocurrency is highly volatile compared to traditional investment vehicles such as stocks, bonds, or mutual funds. Many investment and financial experts advise anyone purchasing cryptocurrency to be aware of the huge price swings these assets often experience.

For example, in November 2021, Bitcoin peaked at a record $69,000. However, this was short-lived. The coin price quickly tumbled, falling by 70 percent in value within 12 months. Although current prices are fairly similar to those experienced three years ago, these conditions are not always promised and are often highly speculative.

Limited capital gains

A person may have the opportunity to purchase a crypto-based asset at a cheaper price and hold it for several years before selling it again. However, capital gains on these assets are not always promised, and there is still not enough historical data to help prove the overall success of these types of securities.

For instance, Bitcoin ETFs can be a beneficial way to help diversify your holdings. However, this is a very new and seemingly foreign investment vehicle that has limited historical performance data. This can make it hard for investors and savers to accurately calculate the possible rate of return they can expect when buying cryptocurrencies or Bitcoin ETFs.

Under-regulated asset

There has been some movement in this arena over the last several years, especially with the implication of strengthening the regulatory conditions for cryptocurrencies and other decentralized assets. While these actions have been met with some hostility, there is yet not enough regulation around the industry to ensure the safety of an individual’s investment.

Many experts have questioned cryptocurrency’s legitimacy, long-term potential, and whether it can be a compelling investment asset within a retirement savings account. Many often consider cryptocurrencies speculative and risky because these investments have limited underlying earnings.

Limited crypto purchasing options

As mentioned, individuals currently have limited options to purchase cryptocurrencies and stick them into their retirement savings accounts. For starters, it’s not possible to separately purchase these securities and include them in a standard 401(k), 403(b) or IRA. Instead, you must open a dedicated crypto account such as a Roth Crypto IRA or Bitcoin IRA.

Having these accounts would mean you can purchase and invest in cryptos; however, there are limitations, and you may still be liable for certain capital gains taxes or responsible for paying any account or brokerage management fees.

No FDIC Insurance

The Federal Deposit Insurance Corporation, or FDIC, is a U.S. government entity that helps oversee the trust and integrity of the American banking system. It provides small account holders with peace of mind and assurance that the U.S. government will back their accounts should there be a financial crisis, a run on the banks, or fraud-related incidents.

The FCID backing and the Consumer Protection Act provide insurance and backing for individual accounts valued at up to $250,000. These measures would allow individuals to keep at least a portion of their accounts insured should an incident render the banks ineffective or insufficient in providing them with the capital.

Unfortunately, cryptocurrencies are not part of this rule and have minimal insurance protection or backing by any central agency. Crypto value is solely determined by public interest and investor activity. Ultimately, without any central support, an individual can run the risk of losing a lot of money in the event of a market downfall.

The Verdict

Should younger generations rely on cryptocurrencies for their retirement? Well, the answer depends on an individual’s personal financial position, and whether they have the leverage to carry such volatility or risk.

Crypto can be a versatile investment that can help diversify your retirement savings. However, this is not enough to build a sustainable retirement savings account, which requires additional investment vehicles to help drive growth and long-term value.

Although crypto has several benefits as part of your retirement accounts, it’s important to rely on the trusted experience of a professional financial broker or financial planner. Make sure that you clearly understand your retirement goals and what will be required of you right now to live a comfortable lifestyle during your senior years.

By making the right decisions, you can choose investment vehicles to help take your retirement accounts to new heights while mitigating highly volatile conditions and minimizing any risk exposure. As a young individual, you may still have a lot of time before retirement, so it should be in your best interest to make the right decision, now to secure your future financially.

Featured Image Credit: Photo by Alesia Kozik; Pexels

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