If you boil retirement investing down to the cold, hard facts, one thing is imminently clear: you should start early and invest in stocks to maximize your nest egg. No instrument has consistently created wealth the same way that the stock market has.
But following that plan is easier said than done. Year to year, the stock market is volatile; ignoring those swings -- and the urge to do something about them -- isn't easy.
For those nearing retirement, there's a different set of rules. Because you will soon be selling some of your investments to live off of, volatility is no longer a good thing. Steady returns should be what you seek.
Which brings us to what might be the steadiest and easiest 8% return available on the market.
Introducing: The Lending Club
Founded in 2007, The Lending Club is one of the leading peer-to-peer lending organizations in the world. The premise of the service is simple, by cutting out the middle man (banks), those looking for loans can get more favorable rates -- while those with the capital to lend will get better returns than they would by letting their money sit in a money market or bank savings account.
The company's website provides a simple overview of the entire process.
The Lending Club rates every would-be borrower from A grade investments -- the safest available, with average interest rates of 7.64% -- all the way to G grade investors -- the riskiest, with an average interest rate of 24.9%.
You have the option of manually selecting individuals you wish to loan money to or inputting your desired risk level and letting The Lending Club automatically spread your money out across hundreds of loans.
The company keeps detailed facts on how all of its loans perform, and quite frankly, the results are impressive. For instance, if you invested in 12-18 month loans, your average return would be 8.5% -- after accounting for defaults and the company's 1% processing fee!
What's more, even if your portfolio performed in the bottom 10% of portfolios over the same time frame, you'd still be looking at a 6.5% return -- which is nothing to scoff at when slow and steady is the name of the game.
As you can see from the chart above, portfolios that have been active for shorter time frames--less than a year--have slightly higher returns than those that have been active for at least 30 months. This makes sense, as any defaults on loans typically don't occur at the very beginning, and take time to filter down through your returns.
The key here is that the scatter-plot above assumes that you've spread your money out across at least 100 different "notes," or borrowers. By doing so, you significantly reduce your risk of losing money. In fact, the company claims that if you have your money in over 100 different notes, and no note is more than 1% of your portfolio, you only have a 0.01% chance of actually losing money.
One popular blogger, Mr. Money Mustache, has even made his investments in The Lending Club public. He keeps detailed records, and over the past two years, he is averaging an adjusted net annual return of 13.13%. That might not be the same as what the stock market has returned, but it's a great average nonetheless.
Why this matters for retirement investing
The most interesting aspect of The Lending Club, when it comes to retirement investing, is the fact that the company allows you to roll over an existing 401(k), open a Traditional IRA, or even a Roth IRA. That's a big deal for those who are in their 50s and 60s and looking for less volatile places to stash their money.
When you're younger and in the "accumulation" phase of your financial life, volatility is your friend. It allows you to take advantage of dips in the stock market while knowing that money you've already invested will eventually come back -- as it always has.
But when you are nearing and in retirement, you are now in the "draw-down" phase. Now, volatility can be an enemy. If the stock market dips and you are forced to make a withdrawal, the money you lost can never come back -- you've sold your investment. If you can rest assured with a steady 8% rate -- that risk is significantly diminished.
Perhaps most importantly, from a risk perspective, The Lending Club screens out any borrowers who:
- Don't have a FICO score of at least 660
- Have a debt-to-income ratio above 40% (excluding mortgage)
- Don't have an "acceptable" debt-to-income ratio.
- Don't have at least two revolving credit accounts open, have had more than five inquiries into their credit score in the past six months, or have a credit history of less than three years.
Is it right for you?
It's impossible to offer blanket retirement investing advice for everyone nearing their Golden Years. Without a doubt, the best option is to find a professional who can help you create a balanced portfolio. But if he or she doesn't know about the Lending Club, it's definitely worth mentioning.