Globally, there is a growing level of personal financial stress. Results from a recent study conducted in America indicate that over 75% of individuals are experiencing anxiety regarding their financial circumstances. Consequently, this is leading to the development of cautious attitudes towards risk and raising concerns about the security of savings for the future, including retirement funds.
Nevertheless, this doesn’t imply that concealing money beneath the floorboards is necessary. Neither does it imply that offering control to a pension fund with low growth, which is expected to depreciate considering present inflation rates. It signifies the importance of making more astute evaluations of available choices and pursuing diversification. This endeavor demands liberation.
In May, Alabama Senator Tommy Tuberville put forward the Financial Freedom Act, which aimed to allow individuals with self-directed retirement plans to include cryptocurrency in their 401(k)s. This proposal was in response to a regulatory directive in March from the United States Department of Labor that sought to prohibit investments in crypto within 401(k) accounts.
The perception that freedom undermines stability is frequently misguided; in reality, it is fear that poses a threat to stability. This is precisely what the U.S. government’s cautious approach towards alternative assets is creating. Many media outlets have also readily joined the movement against cryptocurrencies. A simple Google search regarding Fidelity’s recent announcement to allow individuals to invest up to 20% of their employer-sponsored 401(k) retirement plan in Bitcoin (BTC) showcases predominantly negative or skeptical responses.
After the Terra ecosystem’s collapse in May, the already hesitant individuals have become even more reluctant to include cryptocurrencies, often considered as rock star assets, in their pension portfolios. The majority of people simply seek the ability to retire comfortably, without any extravagant expenses in mind, and they express concerns about the reliability and steady returns of digital assets in growing a secure retirement fund.
Age does not always equal wisdom
Despite the recommendation of exercising caution in the crypto industry, it is risky to dissuade individuals from including digital assets in their retirement investments. Doing so hinders them from potentially accessing a possible remedy to a deteriorating system and inflation that diminishes pensions.
The reality is that the old methods are also unreliable. Conventional pension funds are facing difficulties as well. Nearly all of the top 100 401(k) funds in the United States have experienced significant losses this year due to rising inflation and a volatile stock market. Meanwhile, inflation continuously erodes the value of money, and interest rates remain alarmingly low.
The property market cannot be guaranteed either. Speculation about a housing bubble is rampant due to the potential default of Chinese property giant Evergrande. Younger generations perceive property ownership as an unattainable aspiration.
People who desire retirement savings that will withstand the test of time must acknowledge that relying solely on conventional financial tools and an obsolete banking system is not a feasible approach.
Cryptocurrencies are becoming an opportunity for retirement planning
In view of the escalating inflation in the U.S., which is reaching its highest level in four decades, the notion of transience can no longer be applied. Moreover, instability is progressively becoming a semi-permanent element, influenced by climate change and the ongoing global unrest due to Russia’s invasion of Ukraine. Anticipating the future has become challenging for everyone, including pension funds. Thus, individuals should have the freedom to invest their resources wisely, including directing them towards their own retirement schemes.
Stablecoins can be a wise choice to include in a 401(k), provided they are selected carefully. The emphasis should be on choosing stablecoins that can effectively preserve wealth and safeguard against the negative impacts of inflation. While algorithmic stablecoins like TerraUST (UST) face inherent vulnerabilities to speculative attacks due to a lack of independent asset support, stablecoins backed by tangible assets like gold possess significant promise in terms of wealth protection.
Gold has consistently outperformed stocks, bonds, and fiat currencies during economic crises. An illustration of this is the year 2021, as the pandemic caused fiat currencies globally to become unstable, the price of gold remained stable and valuable, fluctuating within the range of $1,700 to $1,950 per ounce.
In the years since the gold standard was abolished, the value of gold has increased by over 500%, thanks to abundant reserves managed by central banks. However, the recent digitization of gold has made it even more accessible, allowing for the purchase of fractional amounts and easier transactions. Economist Danielle Di Martino has observed that gold has historically shown the least correlation with inflation compared to other asset classes. In fact, gold not only offsets the effects of inflation but also maintains a positive correlation with rising inflation rates, resulting in an average annual performance of +10.6% over the past 50 years. Gold has proven to be a reliable investment during times of high volatility, bear markets, and has even outperformed stock markets on occasions.
Some older Americans turn to crypto to make up for retirement shortfalls
According to data from a platform that enables retirement accounts to invest in cryptocurrency, as baby boomers and Gen Xers get closer to their retirement age, they are realizing the consequences of not saving enough and are considering using cryptocurrency as a means to catch up on their savings.
Chris Kline, co-founder and chief operating officer of Bitcoin IRA, stated that older individuals who aim to catch up or expand their retirement planning are attracted to the appealing growth and return rates.
Data exclusively shared with Yahoo Money reveals that half of Bitcoin IRA’s user base is aged 55 and above, with over three-quarters of its 100,000 users falling into the age group of 45 and older. This challenges the common misconception that digital currency is primarily popular among younger individuals.
According to Kline, these investors are searching for “sizzle and excitement” that traditional investment options such as 401(k)s, IRAs, and stocks lack, driven by crypto’s ability to attract attention due to its price fluctuations. Moreover, they prefer a more active involvement in their investments, rather than just choosing mutual funds or index funds from their employer’s retirement plan options.
“He mentioned that they desire something with a touch of individualism and seek to have greater control and the ability to pursue diverse pursuits.”
According to PwC’s Retirement in America report, a significant number of individuals seek solutions to address small deficits in their retirement funds. The report reveals that individuals aged 45 to 55 have a median retirement savings of $82,600, while those nearing retirement between the ages of 55 and 64 possess $120,000 in savings.
Bernadette Geis, PwC’s U.S. asset and wealth management leader, pointed out that the amount they have saved would only provide them with approximately $1,000 per month in real cash during their retirement, emphasizing that this is insufficient.
Crypto, particularly in a year where bitcoin saw a 120% surge in value from January to mid-April and other digital currencies experienced comparable skyrocketing growth, is where the focus lies.
PwC’s financial crime unit leader, Vikas Agarwal, warns against perceiving cryptocurrency as “quick and effortless profits” solely due to its “remarkable expansion.” He highlights that any investment carries risk, and investing in crypto does not guarantee guaranteed success. A prime example is the decline of bitcoin’s value by 50% since mid-April.
Financial professionals advise against investing all your money in one specific investment, especially one as unpredictable as cryptocurrencies. Agarwal likened the excitement around cryptocurrencies to that of a rapidly growing stock that is quickly gaining popularity in the market.
He commented that certain investors are likely taking things too far when considering cryptocurrency as a method to compensate for having greater funds in their retirement savings.
According to Agarwal, the determination of allocation should primarily be based on the risk level of a portfolio prior to the inclusion of cryptocurrencies. If an investor’s portfolio primarily consists of high-risk assets, it is advisable to allocate a smaller amount to crypto investments. On the other hand, individuals with low-risk portfolios could potentially allocate a higher percentage of their assets to crypto without facing significant repercussions.
To protect investors from excessive risk, Even ForUsAll Inc., a 401(k) provider that recently permitted its retirement savers to invest in cryptocurrency, imposes a limit of 5% on the amount of crypto that can be allocated in portfolio balances.
According to Agarwal, a misconception that many average investors have is confusing stocks, particularly those in IRA portfolios, with cryptocurrencies.
Agarwal advised individuals keen on cryptocurrency to primarily focus on “coins that have gained recognition and established a strong reputation,” such as bitcoin or ethereum.
Referring to less knowledgeable investors, he remarked that they might not be aware of the risks involved, including substantial transaction fees, federal income taxes on profits, and extreme price volatility.
Agarwal stated that the average investor often misunderstands stocks and cryptos, wrongly assuming that they are the same. He advised passive investors against considering the daily market fluctuations and trading volumes of cryptocurrencies, as it may not align with their investment approach.
He stated that trading and divesting cryptocurrencies could become difficult if the unpredictable price fluctuations occur outside of regular trading hours, especially since retirement accounts are typically not used for day-trading as cryptocurrencies often are.
Leave a Reply