Retirement Planning And Digital Currency

When headed into retirement, does digital currency belong anywhere in your portfolio? Most financial planners would likely caution against it. However, fundamental changes in our global economy and a rapidly changing regulatory landscape may challenge conventional thinking.

Generally, as a person approaches retirement they should typically begin to de-risk their portfolio. In theory, this minimizes their “sequence of returns” risk. It is very true that a significant market downturn right at the start of a person’s retirement can dramatically impair their future retirement income. They simply don’t have the time for their portfolio to recover before drawing all too precious principal.

Avoiding this risk of retiring either just before or during a significant correction drives a significant amount of my insurance company's sales to older clients. 

Given recent volatility in Bitcoin, could anyone in their right mind advise their older clients to move assets into digital currencies as well? Surprisingly, the answer will increasing become “yes” over time for two reasons.

Need for diversification

First, de-risking portfolios typically starts with diversifying asset classes to dampen un unsystematic risks. Implementation assumes that the risks of individual stocks, bonds, ETFs, and other funds are unrelated. However, we’re now living in a time where complex financial instruments may seemingly represent independent asset classes, yet actually share intricately linked risks at the end of the day. 

In contrast, digital currencies potentially represent a new type of asset with truly uncorrelated risks to conventional asset classes that retirees should seek. 

Increased Regulation 

Champions of crypto-currencies truly cringe at the possibility of regulation. However, regulation through central banks presents the possibility of greater exchange rate stability.

Barbara Matthews, CEO of BCMstrategy closely follows the financial regulatory proceeding around the world. She said, “Central banks globally ramped up significantly their CBDC work during the pandemic, especially in the US, EU, and UK. Their activity was broad-based, covering both efforts to issue sovereign currencies digitally and efforts to regulate non-government issuance.”

Even formal recognition of specific digital currencies should lead to a more liquid and stable trading environment. If global central banks assume overt roles in stabilizing these emerging currencies, we will see rapid adoption in pension portfolios and ultimately individual accounts as well.

How much digital currency should a retiree hold in their portfolio? It is certainly not zero. Depending on the individual’s risk tolerance, the answer may reasonably range from 1-2% today. As regulation evolves, the generally accepted percentage may grow over time. Clearly, digital currency will continue to reshape the efficient frontier for retirement portfolios in the years ahead.

Contributed by Paul Tyler. 

About the Author

Paul Tyler is Chief Marketing Officer for Nassau Financial Group, an insurance company based in Hartford, Conn. Nassau focuses on four business segments: insurance, reinsurance, distribution and asset management. Paul also oversees the company's insurtech incubator, Nassau Re/Imagine, helping innovative startups. Paul is also host of "That Annuity Show" podcast. He earned a J.D. from Cornell Law School and an A.B. from Princeton University.