The fintechs trying to solve America’s retirement problem
There’s no shortage of alarming statistics about retirement in America.
Nearly half of U.S. households aged 55 and over have no retirement savings, according to a March report by the Government Accountability Office. More than one in five Americans have less than $5,000 saved for retirement, and 15% have no retirement savings at all, according to a study recently released by Northwestern Mutual.
And nearly one in three people approaching retirement age believe they are more likely to learn that Bigfoot exists than they are to save enough to retire comfortably, according to a survey conducted by AARP and the Ad Council.
Yet while there are plenty of companies happy to help consumers who already have a sizable nest egg, relatively few are focused on those who've fallen short on saving for retirement. The void has left a small number of fintechs trying to fill the gap, including Finhabits and Kindur, and a potentially large missed opportunity for traditional banks.
“Most of the industry players don't really want to deal with low-balance accounts,” said Finhabits CEO and founder Carlos Garcia.
Finhabits targets people who are self-employed, work part time or work for a business that doesn’t offer a 401(k) plan, such as Uber drivers and Etsy entrepreneurs. It helps them open a Roth IRA and contribute to it on a regular basis.
Robo-advisers like Betterment and Wealthfront also let consumers open a Roth IRA through their apps. In fact, Uber cut a deal with Betterment a few years ago to give its drivers access to Betterment's IRA and Roth IRA.
The differences between those offerings and what Finhabits is doing, Garcia said, are in the way the fintech communicates with first-time savers and how it deals with their portfolios.
"Our communication is designed to hand-hold a first-time saver throughout the investment process and our portfolios are designed to minimize large draw-downs," Garcia said.
Finhabits invests the money in exchange-traded funds from Vanguard and BlackRock. Each account has a model portfolio assigned to it based on the user’s financial profile and goals.
Finhabits charges $1 a month for its service on balances up to $2,500. After that the fee rises to 0.5% a year, plus an ETF management fee. The accounts start at zero and grow slowly over time, as users add perhaps $40 a week. The average balance is $500.
So far the company has created 70,000 retirement accounts for users. According to Garcia, Latinos tend to be most affected by the retirement savings gap. Garcia markets the company through videos recorded in Spanish and English.
“About two-thirds of Latinos don't have access to a retirement plan at work,” he said.
Garcia would be game to partner with a bank to increase Finhabits' reach.
“If we want to really make it, then we have to tap into existing networks, whether it's a financial institution or a state or a large nonprofit,” he said.
Kindur, a startup that launched in New York in April, is the brainchild of CEO and founder Rhian Horgan, who worked at JPMorgan Chase for 17 years overseeing derivatives and alternative investments.
The idea came out of conversations Horgan had with her parents. Her father, 69, started thinking seriously about retirement three years ago.
“I found myself at Barnes & Noble reading a 300-page book on Social Security,” which is becoming the de facto retirement plan for many Americans, Horgan said. “I thought, this is crazy. How can we expect the American consumer to become an expert on Social Security?”
Her parents’ situation was complex: Her father had six different retirement accounts, her mother had two, they had two life insurance policies, a mortgage and two bank accounts. They had never had a financial adviser.
Horgan’s father made all the financial decisions; her mother wasn’t involved.
“I saw this uncomfortableness and inequity around how they understood the financial picture,” she said.
Because her parents live in Colorado and Horgan is in New York, she started looking for a digital tools that would help them. She found savings tools, but saw little in the way of apps or sites that truly help people plan retirement. And many retirement tools and sites push a specific product.
“What we see as the problem for the consumer today is there is this holistic set of decisions you have to make to navigate government benefits, health and wealth in retirement,” Horgan said. “The existing community today will help you with a piece of this, but the consumer has to DIY the cocktail. And even if you got awesome advice from every single person you talk to, the question is, when you put the pieces together, do they actually fit?”
Kindur — the name is an amalgam of “kin” for family and “dur” for the duration problem that modern Americans have — aims to help baby boomers create a holistic plan for retirement that includes Social Security, health care costs and a plan for living through one’s final years.
“A lot of financial advisers don’t want to talk about health care,” Horgan observed. “But when it costs the average baby boomer $280,000 in retirement, it’s a financial issue.”
The Kindur team has developed what they call a “retirement paycheck” — a plan that literally yields a semimonthly payment similar to a salary.
“In the old days, you had a job and a salary and when you retired you had a pension,” Horgan said. “Now when you stop working, you’re told to just draw down from your accounts. If you’ve ever spent any time in your life unemployed, you remember the anxiety of drawing down from your accounts. Imagine doing that for 30 years.”
The annuity, Social Security and in some cases a rolled-over IRA or 401(k) are combined to create the “paycheck.” Kindur does the actuarial math and the calculations to determine which accounts should be drawn down from and the size of the payouts. Kindur’s registered advisers handle asset allocation and portfolio management for any rolled-over accounts.
A portion of the “paycheck” can be guaranteed by an annuity, through a partnership with insurance company American Equity. Horgan felt the annuity was needed because this customer base is afraid of running out of money in retirement.
“After 18 years at JPMorgan, I knew I could come up with a probability-based answer, like you’ve got a 95% probability of not running out of money,” she said. “That’s not what resonates with Mom and Dad in Iowa. So we thought there needed to be guaranteed income.”
Customers can buy the annuity today and activate the income from it at some point in the future, they’re not forced to pick an arbitrary date.
Thirteen hundred people have created a retirement plan with Kindur. The average customer is 61, a few years away from retirement.
“The two things that are most surprising to people are the health care cost — a lot of people think about Medicare as being free, but that’s just Part A, there’s a lot more to it — and Social Security," Horgan said. "Over a lifetime, it can be worth a half- million dollars. It’s a lot of money for most people and probably their largest asset.”
Kindur helps people make decisions about Social Security, based on things like age, longevity and spousal benefits, so they don’t have to read a 300-page book. The startup charges a 0.5% annual fee on assets under management.
Kindur is in conversations with asset managers and banks about potential partnerships.
“We have had a number of conversations with institutions that understand the problem, they understand it needs to be holistic, and they’re trying to figure out how they can do it without having to be licensed,” Horgan said. “Are there ways for them to be part of this puzzle? Maybe they’re the asset manager, or maybe the paycheck goes into our own banking platform over time and we partner with a bank.”
Why aren’t there more fintechs like this?
Given the huge, sweeping problem of retirement, it's unclear exactly why more fintechs aren't trying to solve it. Theo Lau, founder of the venture capital and fintech advisory firm Unconventional Ventures, sees two obstacles.
The first is a youth-oriented culture that tends to ignore older people. About two years ago, Lau was talking to a fintech’s founders about their product. She asked if it was something adult children could use with their parents (Lau formerly led innovation at AARP).
“Ten minutes into the conversation, the product person said, ‘Our product is not for old people,’ ” Lau said. Bankers have told her the same thing.
It’s also hard for fintechs to convince VCs that this is a sustainable area of focus, so it’s difficult for them to get the capital they need, Lau said. New fintech startups can also find it difficult to get people to fork over their life savings.
“They still run into a challenge where people are like, well, but who are you?” she said. “Why would I trust you with my money versus a bank that I know and can see a branch down the street?”