The crypto guide to retirement savings

From Bitcoin HODLers to dollar-cost-averagers, many — perhaps most — crypto traders spend a lot of time thinking about and preparing for their financial future. After all, crypto, even with some dips, has generally trended upward in the decade-plus that it’s been around, and in that time-frame has beaten virtually all other asset classes in terms of returns. 

But how much time do you spend thinking about retirement savings specifically? After all, past performance offers no guarantee of future gains — and even if you’re all-in on crypto it’s important to know how to plan for a safe, comfortable retirement. Whether you’re in your teens or twenties and aiming for FIRE — “financial independence retire early” — or are plotting a more conventional course, retirement savings requires a big-picture approach. 

In this guide, we’ll cover the basics — from how much you should be putting aside to what kind of tax advantages your retirement stash offers.  We'll also provide key information on non-crypto investments for retirement portfolios, potential ways to maximize retirement investment returns, and steps to take to reach your goals with as little agita as possible.

(Keep in mind: everyone's circumstances are different — so do your own research and consult with a financial advisor if you have questions about creating a plan that works for you. This is not investment advice.)

A brief history of retirement

As social trends go, retirement is a relative spring chicken in the U.S. Following the Great Depression, a Californian named Francis Townsend started a popular movement urging the government to provide all workers over 60 a government pension of up to $200 a month, an amount equivalent to the average worker’s monthly salary. President Franklin Delano Roosevelt responded by creating the Social Security Administration, which provided a mechanism for workers to fund their own future retirements. 

The next big retirement development arrived 38 years later, with the Revenue Act of 1978, which includes Internal Revenue Code (IRC) Sec. 401(k), which allowed employees to defer taxes on income being saved for retirement. But 401(k)s really took off a year later, when the code was adjusted to provide a mechanism for companies to withhold these deposits from payroll. 

Thus was born modern American retirement — which this guide will help you navigate with some easy-to-follow steps.

How do I calculate the amount of savings I’ll need?

Chances are you’ve seen certain figures cited as the magic number a person needs to retire. Maybe you’ve seen $2 million, or a higher or lower number. But really, there is no magic number. The amount you’ll need is dependent on four big factors, as set out here by the retirement brain trust at the AARP. 

1. How long do you plan to live? (Annoyingly, this is not fully under your control.)

2. How much will you spend in retirement? (More, less, or the same as you spend now?)

3. How much will your retirement savings earn? (We’ll help you out on that one.)

4. How old will you be when you retire? (Up to you, but there are several reasons many people retire around the same age.)

We’d also add a fifth point — determining what and how much you earn from other sources of income: pensions, social security, passive income from real estate or other ventures etc. 

Which all boils down to one big quandary: how can you avoid running out of money before you die, given that the average life expectancy in America is 82.3 years?

Ok, so what kinds of savings targets should I be hitting?

In order to live in retirement in a lifestyle approximating the one you’ve become accustomed to, one common strategy suggests that you should save ten times your pre-retirement income by the time you retire at 67. 

To accomplish this, you can begin setting some savings goals. To start with, it’s often suggested that you’ll want to have savings equivalent to your salary by age 30. Thereafter, you can aim for these benchmarks:

• At least 3x your salary by 40

• At least 6x by 50

• At least 8x by 60

• At least 10x by 67 

One common model suggests that you can hit these targets by saving at least 15% of income by age 25, and investing at least 50 percent of those savings in stocks.

Wait, I didn’t start planning for retirement when I was 22!

You’re definitely not alone. Don’t panic! As Forbes’ Andrew Biggs suggests, these well-intentioned rules of thumb might unnecessarily frighten investors. In fact, one major retirement-savings company laments that only 45% of individuals are on track to “afford” their retirement.

According to Biggs, if your goal is to maintain a 70% “replacement rate” on your pre-retirement income, 10x is excessive. Or as another financial planner, William Bengen, puts it — be less concerned with how you get to some magic number, and more concerned with how you’re going spend down your savings once you retire. 

In 1994, Bengen published a study in the Journal of Financial Planning outlining what’s now known as the “4% rule” (or “Bengen Rule”) which has become near gospel within the retirement planning industry. Using historical data that takes into account both boom and bust years, Bengen found that retirees can draw down their savings by 4% each year without running out of money — or at least not for thirty years. So, a little reverse engineering will produce the kinds of magic numbers you might be seeking. 

• $1,000,000 of retirement savings will allow you to safely draw $40,000 a year

• $2,000,000 will allow for a cushier $80,000 a year

• $4,000,000 will allow for $160,000 a year 

To assess your own specific situation it’s a good idea to take stock of where you are and where you need to be by plugging all of your relevant info — age, income, prior retirement savings, desired retirement income — into a retirement calculator like this one from Vanguard. Assuming you’re still a few years from retirement, this exercise will help show you if you’re right on track. If you’re wildly off the mark of where you should be, the calculator will show you how you might right your personal retirement ship.

So when should I retire?

There are practical reasons why most people retire around the same age. The full retirement age in the U.S. is currently 67 for those born in 1960 or after. That age corresponds to being eligible to receive Social Security payments, which for generations have provided a dependable way to cover some basic expenses after leaving the workforce. Because 401(k)s can only be broken into without penalty after age 59 ½, and because full Social Security Benefits only become available at age 67, most people set their retirement somewhere in their mid-sixties. 

In the last decade or so, a subculture of crafty millennials decided that they had way too much stuff to do to wait that long and created the Early Retirement Extreme (ERE) and Financial Independence Retire Early (FIRE) movements, popularized in scads of blogs and podcasts. 

Though this guide will focus primarily on those aiming to retire after 65, the principles outlined by  physicist Jacob Lund Fisker, who retired at 38 and authored a 2010 book on the subject, can be valuable to prospective retirees of any age — and especially those who may have found themselves as part of the nearly half of all Americans not on track to retire with enough money. 

1. Live frugally. Cut out dinners and vacations altogether. Drive the cheapest car you can find. Never pay full price for anything. 

2. Save nearly everything and invest it all. Fisker advises saving north of 75% of your income and investing every penny of it. Once these investments are throwing off enough income to support your bare bones lifestyle, presto, go ahead and retire. 

Ok, got it. So what specifically do I need to do to start planning?

Get rid of credit card debt. Sure, most people carry a few bucks on their credit cards, but many of us carry way too much; credit card debt is up 20% over a decade, and as of 2020, the average American adult had four credit cards and carried over $6,200 in debt. Given that the current average interest rate on those cards is over 16%, there is very little chance that any appropriately diversified retirement portfolio will come close to providing returns that will equal that number. In other words, anyone socking money into a retirement account while simultaneously servicing credit card debt will be doing the financial equivalent of trying to go up a down escalator. 

Create an emergency fund.  You need to be prepared for the possibility of a job loss or an accident or illness that prevents you from working — after all, your bills will continue to show up. So it’s crucial to create an emergency fund to cover expenses for anywhere from three to six months. Those without such a fund will likely instead have to rely on credit cards; as discussed above, carrying large credit card balances is the perfect way to upend best laid retirement plans.

The top tip for retirement saving

Start early — which means, if you haven’t started already, start now!

Someone who regularly puts money away towards retirement earlier will end up with a bigger pile of money upon retirement — obviously. But it’s actually not as much about the amount put away, but rather, the length of time that money can grow before it’s withdrawn. 

What you’re looking for are compounding gains — or, in plain speak, the gains gained by your gains. Einstein is often quoted as calling compound interest “the Eighth wonder of the world.” As shown here, $1,000 invested at an annual, fairly conservative 5% rate of return will become $3,386 to a 65 year-old retiree if invested at 40. However, if that same $1,000 were to be invested ten years earlier, at 30, it would have swelled to $5,516 by age 64 — which is 60% more! 

Fiddling around with a compound growth calculator like this one will show you how consequential a decision to start saving early can be. That being said, it’s counterproductive to flog oneself for not setting retirement money aside earlier; as the proverb says, “The best time to plant a tree was twenty years ago. The second-best time is today.”

Max out all tax-advantaged accounts first

Two things will eat your investment gains alive: taxes and fees. We’ll get to the fees in a bit. But, first, let’s talk taxes. 

The federal government, to entice U.S. citizens to be self-reliant in old age, has created a variety of tax-advantaged products to encourage retirement savings. 

There are two main kinds of tax-advantaged accounts: some give you the tax break when you save the money (that is, now) and some give it to your years down the line when you withdraw the money. 

401(k)s and IRAs are both tax-deferred, meaning that you only pay taxes once money is withdrawn during retirement. 

Say you earn $100,000 and put $15,000 into a 401(k) — you’ll only be taxed on $85,000 of income in that year. (And that $15,000, earning a reasonable 6% annual return, will swell to almost $50,000 after 20 years, and to over $90,000 after 30 years.  (Any withdrawals, including certain mandatory distributions, will be taxable.) 

Roth IRAs, on the other hand, are tax-exempt, meaning that funds invested in them will be taxed in the current year, but no further taxes will be assessed once funds are withdrawn in retirement — as long as certain conditions (including age requirements) are met. 

IRAs and Roth IRAs also both have a much smaller maximum contribution than 401(k)s, and tax advantages are reduced or eliminated for couples and individuals earning very high incomes. 

Another bonus: in a regular investment account, every trade you make can incur capital gains taxes. Retirement savings accounts don’t have the same problem. As your understanding of your retirement needs evolves you can rebalance your account  — from higher volatility assets to less risky ones, for instance. You won’t pay a penny of capital gains taxes, or, for that matter, taxes on dividends — as long as your funds remain safely within a retirement account. 

Details on various account contribution limits can either be found on the IRS website or here.

So! IRA or Roth IRA?

Generally the way to decide between investing using an IRA or Roth IRA is to assess whether your tax rate will likely be higher now or higher when you retire — if it’s higher now, the traditional IRA may the better way to go. Assuming that the tax code doesn’t radically change in the next decades, most people will have higher taxes when they’re part of the workforce than when they’re retired. 

The absolute first, best place to invest would be in a 401(k) if your employer offers any kind of matching contribution program — there are few better creators of wealth than your money, mixed with free money from your employer, growing for decades in a tax deferred account.   

Taxable accounts, like brokerage accounts, generally offer more investing flexibility, a wise investment plan can be visualized as a champagne tower, with the top glasses (which get filled first) representing tax-advantaged accounts, and taxable accounts only being funded once the top glasses are 100% filled. 

Keep in mind: because of tax penalties for withdrawing retirement money prematurely, funds you believe you’ll need before retiring shouldn’t be put in retirement accounts. (That said, the government allows people to break into IRAs or Roth IRAs without penalty to either pay for college or the purchase of a first home.) 

Keep fees low

Like taxes, fees can cut into your investment returns. Fees are generally assessed in two places: through payment to a financial professional, like a financial advisor, or through actively managed investments, like mutual funds. 

The average fee a financial advisor charges for a $1 million account is just over one percent of AUM, or assets under management — in other words, every year a financial advisor minds your money, that manager takes about one percent of your entire investment (not just your gains) regardless of whether it’s been a banner or disastrous year for your portfolio. 

One percent might not sound like a lot, but given that overall stock market returns since 1971 have been 6.8 percent on average, it’s a significant chunk, and represents the other side of the compounding coin. Nerdwallet showed one scenario in which a 25 year-old starts with $25,000 in his retirement account, adds $10,000 annually, and earns a reasonable 7% annual return on his investment. At 65, he would have sacrificed over $590,000 to that 1% fee — or 25% t of his entire portfolio lost to fees.

What is an alternative? Ask Berkshire Hathaway founder Warren Buffet. Buffett has said that he intends to leave his wife a 90/10 mix of stocks and bonds in low-fee index funds, believing the “results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.” 

In 2008, he put his money where his mouth is, betting high-flying hedge fund Protégé Partners $1 million that over a decade, his low-fee S&P 500 tracking index fund would provide better returns than the picks of Protégé’s team of high paid professionals whose salaries and expenses come out of their funds in the form of fees. Final tally: Buffett's index fund gained 7.1% per year, compared to the 2.2% from Protégé's picks. 

One other place that fees like to hide are in fund management fees, a.k.a. management-fund ratios (MERs). In the 1980s and 1990s, actively managed mutual funds dominated the retirement industry. “Actively managed” simply means that a team of financial professionals trade securities in and out of the fund based on their research; their salaries and marketing fees come directly off the top of any returns, and mutual funds commonly had MERs well over 1%. 

But as with the Protégé example from above, study after study demonstrates that the vast majority of those who are paid to pick stocks rarely outperform the market over the long term. Other studies show that fees are a great predictor of investment fees; quite simply, the higher the fees, the lower the returns.

Two methods to reduce fees

Invest in low-fee ETFs that track the market. Learn more about ETFs here. You can find a variety of market tracking products that are passively managed, meaning that computer algorithms automatically make sure that the funds are directly reflective of an underlying index, like the S&P 500. Vanguard’s  S&P 500 ETF, for instance, comes with a .03% MER, meaning that a hypothetical $10,000 investment over 10 years will cost an insanely low $71, versus $1,893, the category average for actively managed funds that invest in similar stocks.

Consider a robo-advisor

Some investors are perfectly content devising their ideal retirement portfolio, the perfect mix of ETFs that contain domestic and foreign stocks and bonds, not to mention investments like crypto and gold. The web is packed with solid retirement investment advice, so much so that an afternoon or two of study followed by a semi-annual or annual rebalance, also easily learned from reputable sources, can provide a totally solid self-managed retirement portfolio.  

Others may need a little handholding. For them, a robo advisor may be the answer. Unlike human financial advisors, robo advisors use AI to maintain client accounts and generally invest only in passive (read: low-fee) ETFs. Robo advisors don’t offer only one-size-fits-all portfolios for all clients.  They generally offer a variety of different portfolios based on investment horizon and personal risk tolerance. And their fees are a fraction of what human advisors charge, currently ranging from .15% up to .25% annually – Nerdwallet did a fee rundown recently. Betterment’s the most well-known robo advisor, and, founded back in 2008, also the oldest; but Vanguard now offers one as well, and at a considerably lower fee. 

What should be in my retirement account?

There is perhaps no one figure who has had a bigger influence on how we think about retirement planning than American economist Harry Markowitz, whose 1952 paper in The Journal of Finance formed the basis for modern portfolio theory — an idea that would eventually earn him a Nobel Prize. Modern portfolio theory is all about figuring out an optimal allocation of assets, and posits, with prodigious supporting evidence, that diversification is the way to maximize returns while reducing volatility. A great portfolio, modern portfolio theory posits, should look more like the Mormon Tabernacle Choir of investments than a barbershop quartet. Markowitz advocated a highly diversified mix of stocks and bonds.

Markowitz obviously didn’t know about crypto, but as the Economist recently noted, BTC is increasingly considered part of a well-balanced portfolio. You likely already have that covered, though!

What's a good stock/bond allocation?

For decades, the prevailing wisdom on allocation was that a retirement portfolio should contain 60% stocks and 40% bonds, with the stocks providing a solid upside during bull markets and the bonds providing a buffer during bear markets; not only providing stability, but also some growth during lean times, since bonds historically have performed better in down markets. 

Lately, however, the classic allocation has shifted towards stocks, with a 70/30 stocks/bonds allocation increasing in popularity. 

Another option is the classic “slow descent” strategy, in which you gradually ease out of more volatile stock investments as retirement age nears. For decades, financial experts touted “the rule of 100” — in which you allow your age to determine how much exposure your retirement should have to stocks. 

• Simply subtract your age from 100 —  that number would indicate how much of your portfolio should be in stocks, so that any given 40-year-old would have a 60/40 stocks-to-bonds ratio and a 60-year-old would have 40/60 stocks-to-bonds ratio. 

• But rising life expectancies have caused experts to alter the equation up to between 110 and 120 (so that today’s 60 year old would instead have 50 to 60% in stocks).

• Then there’s the bond problem. Government bond yields are in the basement, at historically low levels, and there are few indications that they will rise back to the levels that made them solid earners in down markets, as they had been historically. 

So while some bond allocation certainly belongs in all retirement portfolios, are there alternative investments that could be added to a portfolio that might provide gains that are not directly tied to the performance of the stock market? Yes! 

Alternative Investment: real estate

For generations of Americans, buying a home served as a kind of forced retirement plan. Housing prices dependably rose, and as long as mom and dad didn’t default on their mortgage, by the time they hit retirement age they’d be sitting on an incredibly valuable asset that they might part with in order to fund their golden years. But the real estate crisis and subsequent global financial crisis shook the foundations of this thinking — real estate didn’t seem nearly as sure a bet. 

But a little real estate is still a good addition to a diversified portfolio, as long as the real estate investment itself is properly diversified. The best and least fee-heavy way to have some diversified exposure in real estate is by investing in an ETF that holds stocks issued by REITs, or Real Estate Investment Trusts, basically pools of money used to buy hotels, office buildings and other property. The great thing about REIT investments is that they offer considerable tax benefits that neither stocks nor bond investments offer. 

The not-so-great thing about real estate investment is that real estate tends to be highly correlated to stock performance, so a small allocation to real estate within a retirement account may not provide the kind of diversification you may be seeking.

Adding crypto to your retirement mix

The notion of holding crypto — a new asset class with a reputation for volatility — might not appeal to many older Americans. But younger investors have a very different view. And the “smart money” establishment has rapidly been getting on board. 

The Economist — in a piece titled  “Why it is wise to add bitcoin to an investment portfolio” — posits that given crypto’s prominence and future promise, a small allocation is key to diversification and absolutely in line with the principles of Markowitz’s modern portfolio theory. 

Nobody needs to be reminded of the extraordinary returns crypto has offered to many investors, but it’s the diversification crypto affords that is key for your retirement portfolio. Bitcoin, the Economist notes, “tends to move independently of other assets: since 2018 the correlation between bitcoin and stocks of all geographies has been between 0.2-0.3. Over longer time horizons it is even weaker.” Weak correlation is the best recipe for strong diversification. 

Hedge fund manager and crypto booster Paul Tudor Jones has said he aims to have 5% of his portfolio in bitcoin. Another crypto bull, investor Kevin O’Leary, recently said he hopes to put 7% of his holdings in crypto.

Until very recently, there was no way to invest in crypto through company 401(k)s — that’s just starting to change. In June 2021, 401(k) administrator ForUsAll Inc  teamed up with Coinbase to offer a 401(k) product that allows holders to allocate up to 5% of their employee retirement plans to Bitcoin, ETH, and other crypto. (To participate, your employer needs to offer retirement plans administered by ForUsAll. Because employees can’t choose their 401k provider, crypto investment remains a limited, but growing 401(k) feature.)

Can I hedge against crypto’s volatility?

Yes. As with other more volatile investment categories, like stocks, the slow descent strategy will be valuable when investing in crypto; when you’re younger, you have a longer investment time horizon, and historically, longer time horizons are associated with lower volatility. So as retirement approaches, retirement savings can be gradually shifted to less volatile assets.

And the very nature of retirement saving will provide a strong hedge against crypto’s = volatility. Given that contributions to retirement accounts are made across many years, you will naturally be using a dollar cost averaging (DCA) strategy, assuring that over decades, you’ll have bought crypto at an average price — at neither at the top nor the bottom of any cycle. The way to further lean into a dollar-cost averaging strategy for all your investments (not just crypto) is to set up automatic transfers from your checking account so that you invest a little bit into a retirement account every month, or, in the case of a 401(k), every pay period.