Cryptocurrencies are here to stay. A 2024 Pew Research Center poll found that 17% of U.S. adults have invested in, traded or used a cryptocurrency. Big firms such as BlackRock, Fidelity, Franklin Templeton and Schwab have made crypto investments available to their customers. The incoming Trump administration is crypto-friendly.
Should you consider crypto? It depends on where you are in life and what your financial situation is. The general rule is, don’t gamble with any money you can’t afford to lose.
Cryptocurrency is way out on the risk curve. It’s volatile. You can make a bundle or lose it just as fast. Some people have made their fortune; some have lost millions. Most folks have come out somewhere in the middle.
It is somewhat like buying lottery tickets or going to a casino. Maybe you’ll get lucky, and unless you’re very poor, losing $50 once in a while won’t imperil your financial future. A small stake in crypto won’t either. But making big bets can be perilous.
If you’re young, you can wait out the crypto market. Sooner or later, it will probably go up. Older people don’t have that luxury. When you’re retired, you’ll need a steady, reliable income to replace your former wages or business earnings.
Though some merchants do accept certain cryptocurrencies, most often, the only way you can get money out is by selling it. If you need to cash in when the price is up, you’ll do fine. But if you must sell when the price is low, you won’t. That’s the problem. Most cryptocurrencies are extremely volatile and experience wide price swings.
Reducing risk while keeping up with inflation: Stocks and bonds
People in or near retirement need to have their investments, savings and future income keep up with inflation without exposing themselves to excessive risk and volatility. It takes a balanced approach.
Here are some more appropriate investments for people in their 50s and older, starting with options that are higher on the risk scale and then moving on down to lower-risk possibilities.
Individual stocks. Having some money in common stocks can make sense, provided you can withstand volatility. While the stock market has performed spectacularly in recent years, far outpacing inflation, you have to have the stomach to bear sharp declines. (Remember 2020?) The law of gravity in the stock market hasn’t been repealed! Many financial experts recommend caution today because the major stock indices are at all-time highs.
Don’t overdo it. The right equity allocation depends entirely on your situation. Stick to a smart allocation over time.
Mutual funds and ETFs. Another way to reduce risk is to invest in stock mutual funds and ETFs instead of individual stocks. You can also achieve risk reduction by concentrating your holdings in stocks that may pay substantial dividends so that you’ll have a stream of income even if the market plummets.
Bonds. Bonds are less risky than stocks and pay out more income than most stocks. They’re worth considering, but they have drawbacks too. With individual bonds, you’ll get your principal back if you hold them to maturity, assuming the issuer (a corporation or municipality) remains solvent. That’s called credit risk. U.S. Treasury bonds have virtually no credit risk, but they pay lower rates.
Most people instead invest in bond funds but their price is not guaranteed. When interest rates rise, the price per share of a bond fund will fall. That typically won’t affect dividend payments, but it can be unnerving.
Lowest-risk options: Bank CDs and guaranteed fixed annuities
Guaranteed vehicles, in contrast, are very low-risk because both income and principal are guaranteed. What you see is what you’ll get, which is why they’re popular and useful from both financial and peace-of-mind viewpoints.
They include bank certificates of deposit and CD-type annuities, officially labeled multi-year guarantee annuities (MYGAs). With each, you get a guaranteed interest rate for a certain term. The biggest risk is that if you need to cash in a CD or MYGA before the term has concluded you’ll pay a varying penalty, which may be substantial. Some CDs and most MYGAs do offer penalty-free partial withdrawals.
Though similar in many ways, CDs and MYGAs have some significant differences. Bank and credit union CDs are guaranteed by the Federal Deposit Insurance Corp. (FDIC). MYGAs are not. But annuities are backstopped by annuity guaranty associations in every state. Coverage limits vary.
CDs in nonqualified accounts create taxable income every year. Nonqualified annuities offer tax deferral as long as you don’t take withdrawals from them, and you can defer interest distributions as long as you like. Any withdrawals of interest from an annuity before age 59½ are normally subject to a 10% IRS penalty.
Both CDs and annuities can also be very suitable for an IRA or Roth IRA.
Have your cake and eat it, too?
Can you get market growth potential without risking your principal? Surprisingly, it’s possible.
Fixed index annuities, first introduced in 1995, protect you from any losses but offer upside potential and can guarantee income too. Like any other vehicle, they have pros and cons.
Fixed indexed annuities credit interest annually to your account based on annual changes to a market index, such as the S&P 500 or Dow Jones Industrial Average. You receive an interest credit when the index value increases.
When index value decreases, even if the market dives 30%, you’ll lose nothing. Your principal and all previously credited interest are always protected, even if the stock market crashes.
But you don’t usually get all of that increase. You normally get only part of it because the annuity upside will be limited by a cap or participation rate percentage. So, you can have part of your cake and eat it, too.
Many indexed annuities let you purchase an optional income rider that guarantees a certain future lifetime income. These annuities are complex, and finding one that fits your needs takes more careful consideration than with a MYGA, which is straightforward.
If you’re considering investing in a cryptocurrency, evaluate your situation first. Do you need to take the risk it entails? Have you considered the alternatives? If you do decide to invest, limit your risk with a modest stake if you’re in your 50s or older.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.
