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Is it really possible to retire on passive income from digital assets?
IMPORTANT NOTICE: This article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.
- The retirement age across the globe is increasing and those who have not yet retired expect to work much longer
- Many people do not retire because they cannot afford it
- With interest rates at rock bottom, inflation rising and recent stock market volatility, traditional investment strategies may be a less attractive option to save for retirement
- Digital assets can be an alternative, as a monthly deposit of just $500 could make you a millionaire by retirement age
Retirement can mean something very different to different people. While some are working towards the dream of early retirement, others might be worrying whether they will ever be able to retire at all. Saving enough for retirement is the main challenge for many, so having a plan in place is of utmost importance, and digital assets could be one way to reach your goals.
Statistics show that giving up work once and for all is becoming harder and harder, with the rising retirement age marking a concerning trend in many countries. For example, the chart below shows how the labor force participation rate of the over-65s in the US has developed. The upward trend of the last few decades was only interrupted by the Covid-19 crisis, after it reached a peak of 20.8% in 2020 – the highest since the early 1960s. The rate was at its lowest in 1985, at around 10.5%.
This trend suggests that the baby boomers (people born between 1946 and 1964) who are gradually reaching retirement age have too much debt and too few savings to retire and are now forced to compete in the labor market with millennials.
The problem of saving for retirement
The current economic backdrop makes it much harder to save for retirement today, while those who are looking to retire soon may have less in their savings accounts than they originally hoped for. We are currently experiencing a worrying rise in inflation across the globe, hitting a 40-year high of 7.9% in the US, and a fresh record high of 5.9% in the Eurozone (as of February 2022). As such, it is increasingly difficult to predict what the cost of living will be at your desired retirement age.
Consequently, those wishing to retire early – or even at all – must have a solid plan in place to finance their retirement. However, with traditional bank accounts paying rock-bottom interest rates of well below 1%, savers must search for alternative ways to avoid losing purchasing power.
To combat these issues, those saving for retirement today could look to combine a range of investment options to grow their wealth over the long term. This can include investing in the stock market, bonds, commodities, real estate or cryptocurrencies and other alternative investment options.
It is up to the individual which investment assets suit their portfolio best, depending on their risk tolerance and how close to retirement age they are. It is important to remember, however, that the value of each of these investment assets is exposed to a certain level of volatility and dependent on the wider market backdrop, business cycles, and geopolitical situation.
For example, those who still plan to work for a decade or longer could look at higher-risk strategies, such as investing in stocks and cryptocurrencies, to grow their wealth over the long term. These markets tend to be volatile and could suffer significant falls, especially during recessions and times of geopolitical conflict. Yet over longer periods of times, risk markets tend to correct themselves and reach new heights. However, for those who intend to retire sooner, a greater focus on passive income rather than capital appreciation may be warranted.
How digital assets fit into a retirement plan
Digital assets could prove an attractive option for both those who dream of retiring early and those nearing retirement age today. Passive income strategies like the ones offered by Yield App and other digital asset platforms allow savers to earn additional interest on a range of cryptocurrencies, such as Bitcoin and Ethereum (for those with a higher risk tolerance), and stablecoins (digital assets pegged to fiat currencies, for those looking to reduce volatility).
For example, if you were to retire today with $120,000 in your savings account, you could deploy your savings into a stablecoin portfolio. Assuming an annual interest rate of 10%, compounding daily, you could generate a monthly passive income of around $1,000 to live off. If you double the initial investment, you would consequently also double your monthly disposable income to $2,000.
However, even those who are just starting to think about retirement can achieve this goal early with a smart strategy. Using the power of compound interest (this is when you reinvest interest instead of paying it out), even small monthly deposits can turn into a large retirement pot over the years. Yield App has an auto-compound option available on its portfolios, meaning the interest you earn can be automatically redeployed into your chosen portfolio every day.
For example, a monthly deposit of just $500 over 10 years into the same stablecoin portfolio would leave the future retiree with a total pot of $102,660. The total earnings of $42,723 are the result of compound interest adding up to a profit of 71.1% on the total $60,000 deposits over a decade.
With a longer time horizon, the total percentage of interest increases exponentially. So if the retiree paid into the same portfolio for another 10 years, the total profit over two decades would be more than three times as high at 218%, with a total pot of $382,156. Over three decades, it would increase to 533% and this savvy investor would retire a millionaire.
Once the goal amount is reached, these assets can continue to work for you even after you retire. For example, if a retiree deploys $381,680 into a stablecoin portfolio paying 10% in annual interest, compounding daily, the monthly income from this would be a comfortable $3,193.52 – more than seven times the monthly deposits of $500 over 20 years.
With the retirement age across the globe rising and those who haven't retired yet expecting to have to work much longer, alternative strategies to save for retirement are in demand. Those saving for retirement today face new challenges not experienced by previous generations – rock-bottom interest rates, rising inflation and a stock market that has just completed a long bull run. Add to that today’s geopolitical uncertainty, and the outlook for savers isn't exactly rosy.
With a digital asset strategy, even small allocations over a longer time horizon make saving for a comfortable retirement possible. Notably, digital assets are not just for younger investors who are willing to take on more risk. Stablecoin strategies could prove a useful addition to one’s portfolio at any age, offering an opportunity to grow capital without the volatility during the younger years and a chance to earn passive income post retirement.