Retirement planning is the process of determining how much money you need to live comfortably during your post-employment years and developing a strategy to achieve that goal. It involves estimating future expenses, evaluating potential income sources, and implementing investment plans to ensure financial security. Traditionally, this has been approached using established principles and tools such as the Trinity Study and the concept of safe withdrawal rates.
The Trinity Study, for instance, suggests that a withdrawal rate of 4% from a balanced investment portfolio, consisting of 50% stocks and 50% bonds, can sustain a 30-year retirement without running out of money. This methodology relies on the compounding nature of investments to generate returns over time, providing a steady income stream during retirement.
However, when it comes to a highly concentrated bitcoin portfolio, the traditional retirement planning frameworks lose their applicability. Bitcoin doesn’t conform to the principles of compounding, as it doesn’t generate interest or dividends like traditional investments. Therefore, the conventional safe withdrawal rate and compounding models don’t translate seamlessly to a bitcoin-centric retirement plan.
In the absence of compounding, a more straightforward approach to retirement planning with bitcoin involves using actuarial tables. These tables estimate life expectancy based on age and gender, providing a foundation for calculating how much bitcoin is needed to sustain an individual throughout retirement.
Put more plainly, one can estimate living to 100, subtract their desired retirement age, and then divide 100 by the resulting difference to determine a “safe withdrawal rate” for spending bitcoin. These rates will be notably lower than the commonly mentioned 4%, given that a 4% rate would only sustain bitcoin for 25 years. For any retirement lasting more than 25 years, a withdrawal rate below 4% becomes necessary. This uncomplicated calculation can be performed on a napkin or postcard, making it accessible to anyone without the need for complex financial software.
Here is a table displaying withdrawal rates based on retirement age, using an actuarial approach:
As an illustration, if an individual aims to retire at 55, his withdrawal rate would be 2.22%. Should this individual calculate his anticipated retirement expenses to be 1 bitcoin annually, basic arithmetic would reveal that saving 45 bitcoins would enable him to spend 1 bitcoin each year for the ensuing 45 years of retirement.
In essence, bitcoin retirement planning requires a shift from the traditional reliance on compounding returns to a more direct assessment of how much bitcoin is required to cover living expenses during retirement. The simplicity of the actuarial approach aligns with bitcoin’s unique characteristics, offering a pragmatic method for individuals looking to navigate their retirement with a concentrated holding.
Assuming fiat still exists when you retire, the complexity of bitcoin retirement planning arises when fiat currency is introduced into the equation. In our current fiat-driven world, it’s not as simple as tallying up expenses in bitcoin to determine the required savings. Moreover, living in a world marked by unpredictable inflation and an expectation to spend retirement funds in fiat rather than bitcoin adds another layer of complexity. Unfortunately, the prospect of a retirement planning postcard remains a distant prospect.
Instead, we must project anticipated retirement expenses, accounting for inflation, and employ an expected rate of return for bitcoin to estimate the future value needed. In this scenario, the conventional safe withdrawal rates don’t apply to the bitcoin segment of the portfolio. Rather, the same actuarial table presented in this article becomes the tool for navigating bitcoin and the Trinity Study withdrawal rates for any remaining fiat.
Accurately determining the expected rate of return for both inflation and bitcoin poses significant challenges. Firstly, inflation rates are inherently personal, as the Consumer Price Index (CPI) may provide a general figure but excludes substantial expenses like housing and raw materials. Moreover, individual spending habits can lead to considerable variations in inflation rates compared to CPI or even among different households.
Turning to the expected returns for bitcoin, historical data shows average returns hovering around 200% per year and median returns around 90%, accompanied by drawdowns ranging from 50-93%. This wide range of possibilities makes future planning intricate.
Considering the prospect of retiring on your bitcoin holdings demands a strategic approach. Either you should already possess enough bitcoin to support your retirement, or you ought to prepare for an extended working period. This extended work commitment becomes essential not only to preserve your existing bitcoin stack but also to navigate the inherent volatility in bitcoin prices and gauge where they ultimately settle. Bitcoin’s value can experience substantial fluctuations, and a longer working timeframe provides the flexibility to adapt to market dynamics and make informed decisions. Essentially, it’s a pragmatic measure to safeguard your financial position and make more informed choices about when to transition into retirement based on the evolving landscape of bitcoin prices.
Another crucial aspect to factor into your retirement decision is the timing concerning market conditions – specifically, considering retiring during bear market years rather than bull market years. Let’s break down why this matters.
Imagine your retirement plan entails a withdrawal rate of 0.5 bitcoin per year. If you opt to retire when bitcoin is trading at $500,000 per coin, it might seem feasible initially due to the high dollar price. However, should bitcoin subsequently undergo an 85% drawdown, and you’ve already retired, living on the same 0.5 bitcoin per year may become challenging. In this scenario, you’d be committing to an annual income of $35,000 instead of the anticipated $250,000 due to the volatile nature of bitcoin.
Given this inherent volatility, short-term planning at the time of retirement becomes an essential task. To navigate these fluctuations, especially when fiat currency remains widely utilized, it makes practical sense to convert a portion of your holdings back to fiat, say 5 years’ worth of living expenses. This ensures that you have a buffer to your needs during periods of heightened volatility, preventing unexpected financial strain and allowing for more stability in your retirement income.
For retirement planning with bitcoin, traditional methodologies face a paradigm shift due to the unique characteristics of the asset. The conventional compounding principles and safe withdrawal rates are rendered obsolete, necessitating a shift towards an actuarial approach. By estimating life expectancy and determining withdrawal rates based on retirement age, individuals can calculate the amount of bitcoin needed for retirement. However, the integration of fiat currency introduces complexities, requiring projections of anticipated expenses with inflation rates. Additionally, the timing of retirement in relation to market conditions, especially considering bear vs. bull market years, becomes crucial to avoid potential income shocks due to bitcoin’s volatility. This prompts the consideration of converting a portion of holdings back to fiat for stability during turbulent times. In this intricate landscape, careful planning and an adaptable strategy are essential for those seeking to navigate retirement with a concentration in bitcoin holdings.
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In this article, I consider a concentrated portfolio to be anything exceeding 40% in bitcoin, irrespective of whether the individual opts for portfolio rebalancing.
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Origin Wealth Advisers LLC is a fee-only, financial planning firm helping bitcoin families live their most fulfilled lives. Origin provides financial advice and does not sell any products. Prior to founding Origin, Morgen started her career trading equity options and later worked for two large private wealth management firms serving ultra high net worth clients. Morgen has two podcasts, “Bitcoin for Advisors” and “Money Owners,” and also wrote the “Personal Finance QuickStart Guide.” In her free time Morgen homeschools her two young children, cooks, and spends time outside with her family.