The economy today is in a constant state of flux and metamorphosis, with cost of living and inflation rising exponentially. Add to that rising expenses on other basic necessities like healthcare, across urban and rural areas. The pandemic has reiterated the need to save for medical emergencies, and as an individual grows older, so does the need for medical care. In such a scenario, it is critical to have a sound retirement plan. Payouts from pensions alone are not adequate enough to meet rising costs of living. It is thus advisable to have a diversified investment portfolio that supplements incomes from different savings instruments, to maximise your pot for the golden years.
We are currently plagued by a world of falling interest rates. If imminent retirees are to stretch their money through their lifetimes, they need to generate a return on their portfolio that is higher than inflation by at least 2-5 per cent. By 2050, India will be home to one of the largest population of retirees in the world, but the shortfall in retirement savings, i.e., the funds required to cover 70 per cent of pre-retirement income for each person, will increase from $3 trillion in 2015 to $85 trillion in 2050, according to a study by World Economic Forum. At 10 per cent, the yearly growth of the gap in India’s retirement savings will be the fastest among eight countries analysed by WEF, including China, US and UK. It will also be well above the global average of 5 per cent.
A retirement portfolio needs to be tailor-made to suit this cohort’s specific requirements. Since there is no earning in this phase of life, funds must be invested carefully, as retirees can’t afford to lose money in risky schemes, like, say, millennials. Diversification is vital for insulating your investments against market volatility. Furthermore, to keep up with rising costs, a high-yield savings avenue is preferable. Traditional retirement models like fixed deposits and PPFs may be considered a safe option in terms of value creation, while keeping a steady, guaranteed principal, but the returns may not be enough to sustain current lifestyles. Smart financial planning involves a mix of both guaranteed but low returns and high return investment options based on one’s risk appetite.
Peer-to-peer lending is a viable and attractive option that provides high returns — some going up to 15 per cent for a comfortable retired life. At an advanced age, individuals may not have the financial acumen or ability for asset management, and can benefit from a platform that makes those decisions for them. P2P lending platforms have long held the reputation of being a risky asset management class, but the reality is far from it. Unlike other investment instruments, returns on P2P lending are not dependent on market fluctuations, hence, investors don’t have to anxiously monitor market movement as with stocks and bonds.
Moreover, P2P lending platforms can help individuals escape taxes payable on returns earned from fixed deposits. In fact, the online lending model allows investors to compound their earnings, as they earn back their principal and interest investments, and get a chance to re-invest their payments. This further accentuates the retirement fund, and gives a much-needed cushion for life’s uncertainties.
The platform handles all administrative tasks of the loans, including underwriting, closing, distribution of loan proceeds, and collection of monthly payments. Those monthly payments are then remitted on each loan, making the selection of which loan to invest in the sole responsibility of the retiree. Investors receive monthly repayments as borrowers repay the loans they receive at a predetermined interest rate. This gives investors the prospect to either reinvest their earnings in new endeavours, or just enjoy a steady monthly revenue stream.
Online lending platforms are heavily tech-backed and use a high level of automation — a combination of artificial intelligence and machine learning — for risk mitigation. The use of technology allows borrowers and lenders to eliminate middlemen (i.e. big banks), letting them benefit from favourable rates. Every loan on P2P platforms is shared by multiple lenders to reduce risk. Even if someone defaults on their monthly payment, these platforms have mechanisms in place to reduce the burden on the lender, with some companies even having a lender protection fund set aside to compensate lenders in case of major default.
The investor market for the P2P lending industry has been cautiously optimistic, projecting a growth of $10 billion by 2025, and is placed as one of the fastest growing areas in finance. Individuals planning for retirement must weigh their investment options and allocate a part of their savings portfolio to P2P lending to reap its tremendous benefits.
The writer is co-founder & CEO, LenDenClub