I was reading the business section of my Sunday New York Times yesterday (yes, I still get a physical paper delivered once a week) and this front page story grabbed my attention: For Retirees, a Million-Dollar Illusion. It was all about the problems that retirees are having today because of the extremely low yields on fixed income investments.
Even relatively wealthy retirees with a $1 million nest egg are in serious risk of running out of money. From the article:
But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.
That is indeed bleak. What these retirees need is a stable and consistent high yield investment. If inflation is running at 3% and they are withdrawing 4% annually then what an investor needs is a 7% return in order to never run out of money. Now, 7% today is a pipe dream for many investors but readers of this blog know otherwise.
But we need to get to a much larger scale. We don’t just need Lending Club and Prosper to keep growing we need many more options in this space. We need more consumer loan platforms, small business platforms, real estate platforms, auto loan platforms and student loan platforms. We need to be able to have tens of millions of investors not just the 100,000 or so we have today.
Now, I am trying to do my part to grow this fledgling industry with this blog and the LendIt Conference. But I encourage everyone to keep spreading the word. The huge number of baby boomers hitting retirement age need better options than they have today.
I agree that more options in this area of investing would be nice. It had seen some growth but it hasn’t been real fast. I suppose levels of trust and exposure in this arena are still low. Makes sense, most folks I talk to about Prosper, etc. Still do not know what they are. Eventually, if good returns are earned, I would think growth will be inevitable.
I think we will see this 150% – 200% continue for several years. And it doesn’t take many years of that kind of growth to get to very big numbers. I would like to see the broad online lending space be at $1 trillion in annual loan volume in a decade or so. If they maintain this current growth rate that number is possible.
I’d really like to see more coming out for student loans. I just graduated medical school with ~230k in student loans with the majority of them from private institutions. Through some research I did find https://www.sofi.com/loan-refinance.php.
From an investment standpoint, I can’t really see student loans being particularly attractive investments though. Even in the setting of students with advanced (doctoral) degrees.
Here’s to hoping, though!
Peter,
I agree with your analysis. Are there any up and coming platforms other than LC and Prosper that are not just fly by night companies?
Westin,
I would think student loans would be VERY attractive investments. Unlike most debts, they are generally NONDISCHARGABLE in bankruptcy. I would gladly invest in medical school student loans because people are always going to get sick.
LC and Prosper are the only games in town for regular investors. Accredited investors will have another option with Circlebacklending.com launching soon.
Just curious, and I know this is not the topic of the post, but I was wondering what percentage of Prosper loans are actually owned by Prosper itself?
I’m sure it’s a great investment for their owners, but I just wonder if there is enough individual lender participation to fund all of the loans on the platform.
Prosper does not normally participate on its own loan platform as an investor, but there are plenty of large and small investors so that nearly all loans are funded at Prosper.
@Matt:
I agree. I think you are going to see more and more people who have been through bankruptcy and are really sincere about getting back on track. This population will essentially have a clean slate, except for those student loans. At that point in the game, perhaps those folks will statistically be a moderate to lower risk regarding repayment, even though they have a bankruptcy on file? Just my opinion. . . . and this would be regardless of degree type obtained (or in many cases, degree incomplete). I believe there are a lot of people out there who may have outstanding student loans and abysmal credit scores, but do live very frugally and within their means, presenting a large and unexplored segment for p2p investors.
I gotta agree with Westin on this one. I think student loans would be terrible investments. He just graduated medical school with $230 debt. That’s a ton of debt for a young person to carry early in life. Not to mention young people acquire their greatest amount of additional debt up to about age 40.
2-days ago I was working with a 24 year old Marine who had acquired about $15K of student loans. All were in collections, but collection efforts are halted while in the service. His credit score was 422. Collections can begin again when he leaves the service, but he told me he plans on going for 20 years.
Student loans from the federal government don’t get discharged in bankruptcy, this isn’t true for loans from private lenders. I would consider investing in student loans if I had access to grades and majors, so I could ensure I was investing in students that had a high likelihood of paying back. >100k in debt medical student has a different risk profile than >100k in debt PhD of English, just looking in terms of potential income to debt load. I think English majors are awesome, they just don’t make enough to pay back the loan.
I’ve tried to show my parents the returns I’ve been making in LC, but they find the platform and my process of investing kind of convoluted, and though they thought they’d been following good investment advise throughout their working career, they have gotten screwed by the 15+ year lack of net returns from the market, and by how little the home that they lived in for 30 years sold for in the down housing market. They aren’t hopeful that there’s a better option out there. And they have just retired.
I’ve made >10% IRR/yr for the last 3.5 ish years that I’ve been investing in LC. Not stellar, but really not bad either.
I think >10% for the last 3+ years is an excellent return by anyone’s standards. But many people still don’t believe these returns are sustainable or that the risks are simply too great. I believe that most people will come around eventually, I think, but it may take a while.