As life progresses, the importance of insurance as part of long-term planning increases. Because insurance is about providing a financial safety net that will help a person take care of themselves and their loved ones when they need it most.

That said, a retirement portfolio should be comprised of a wide variety of assets.

Should cryptocurrencies be one of them?

Traditional diversification has two advantages. It supplies its own portfolio with “uncorrelated” assets so that when some investments increase in value, others hold their value constant or even increase it. It protects you from catastrophic losses if one of your investments explodes.

The real benefit of diversifying with cryptocurrencies is in limiting extreme results. If one cryptocurrency fails and the investment goes to zero, other crypto investments can still do well.

Keep this in mind – crypto insurance is on the verge of becoming a “huge opportunity,” according to a Bloomberg report. A spokesman for Allianz, one of the largest insurance companies in the world, told the news publication that the company is researching product options and coverage in the space as cryptocurrencies are “on the rise” and become more relevant, important and ubiquitous in the real economy.

Anjali Jariwala, a certified financial planner, told CPA to CNBC:

“To determine how much money to invest in a riskier asset class, it is important to first assess your own financial situation and make sure that you are funding the pool you need.

She added.

“You should only consider investing in a riskier asset class like cryptocurrency when there is no other pool to finance and you still have excess cash flow.”

But there are a few things to know before jumping off the cliff.

Are there any “crypto-friendly” retirement accounts?

Adding crypto directly to a bond portfolio can be tricky.

While you are paying off your high-yield debt, consider adding your 401 (k) to an employers match, says Jariwala. “Recruiting is ‘free’ money, so it’s important to take advantage of it,” she explains.

But not like this. She even recommends diversifying your retirement investments by putting pre-tax money into a 401 (k) and after-tax money into a Roth IRA. In a traditional 401 (k), contributions are made in dollars before taxes. Ergo, the money you pay in comes directly from your wages, which reduces your taxable income for the year.

With a Roth IRA, a person invests taxable amounts. If they draw it in retirement, that person is tax-free, provided that the payout requirements are met.

However, neither a Roth nor a traditional IRA provides employer matching results, as most 401 (k) s do. And there are income limits for those who can use these accounts that don’t apply to 401 (k) s. While all 401 (k) plans with employees who are not owners are subject to the very strict and far-reaching rules of the Employee Retirement Income Security Act of 1974 (ERISA).

One of the primary purposes of ERISA is to protect employees whose ranks and profiles participate in employer-funded pension plans. With every form of investment, the risk is now present. One has to take some care before going deep into the crypto / bitcoin pond.

Although it posted historic gains over the past year, it’s still a relatively new asset and can be quite volatile. For example, at the time of writing, the cryptocurrency is trading over $ 50,000 after rising 5% in 24 hours.

Despite Bitcoin trading in the green, volatility remains a top concern.

 

Source: CoinMarketCap

It is important to consult a financial advisor to make sure you understand the risks of any investment you make, especially when it comes to cryptocurrencies.

Real life calculation

With Bitcoin, you can retire or even retire early regardless of the holding value. Could be 0.01 or 0.001 of a bitcoin.

Here are some real life scenarios with both liberal and conservative retirement scenarios. Dollar Cost Averaging (DCA) is one of the key aspects to improving the net worth of a portfolio. Lark Davis, a prominent investor and analyst, highlighted its importance in a series of tweets.

(Here the calculations don’t take into account inflation, cost of living adjustments, and other variables that traditional financial planners include in their retirement planning calculations. The beauty of Bitcoin is that its enormous returns obviate the need to actually factor these variables into account. http://www.moneychimp.com/calculator/compound_interest_calculator.htm)

The next question for Bitcoin retirement planning is how to determine compound interest. (The interest earned each year is added to the principal. So the balance not only grows, but grows at an ever increasing rate. This is one of the most useful concepts in finance.)

Assumption: Bitcoin’s compound interest is likely to be much higher, or rather 25 to 37.5%, over a period of 15-30 years.

In 2021 alone, it is estimated that 106 million people will own Bitcoin. So less than 10% of the world population HODLs BTC.

Now imagine getting another 10% BTC in the years to come. Let’s go some more – what if 50% of the world is using bitcoin?

 

Source: buybitcoinworldwide.com

Now to retirement provision.

Let’s start with retirement planning for someone with 0.01 bitcoin. He / she wants to retire in 15 or 30 years.

Scenario 1 (MAINTENANCE)

Present value of 1 Bitcoin = $ 50,000 (approximate)

One person has 0.01 bitcoin

Save $ 100 / week ($ 5200 / year) for 30 years

Bitcoin Estimated Compound Interest Over 30 Years = 25%

The table looks like this –

 

Source: Moneychimp

Scenario # 2 (MAINTENANCE): Let’s repeat Scenario 1, except for a 15 year timeframe –

 

Source: Moneychimp

Observation: The sheer power of compound interest is shown here. That is, compound interest is overvalued over a 30 year period compared to a 15 year period. What does this mean?

Well, to quote something Warren Buffett said a while ago:

“Today someone sat in the shade because someone planted a tree a long time ago.”

This is why everyone should start planning for retirement as early as possible.

Scenario # 3 (ALWAYS SAVE):

Present value of 1 bitcoin = $ 50,000

One person has 0.01 bitcoin

Save $ 100 / week ($ 5200 / year) for 30 years

Estimated Bitcoin compound interest over 30 years = 37.5%

 

Source: Moneychimp

Scenario # 4 (ALWAYS SAVE): Let’s do scenario # 3, except for a period of 15 years –

 

Source: Moneychimp

These 4 practical plans can guide anyone seriously considering taking this path. But keep this in mind, be it 0.001 BTC 0r 0.1 BTC or even> 1 BTC, stocks will soar to lows.

Inference

Ultimately, Bitcoin is a volatile asset with a higher inherent risk than those one would normally invest in for retirement. However, a long-term investment is a great way to diversify your portfolio and offers more advantages than other alternative investments.

Happy retirement, HODL friends!