I recently visited the homepage of Lending Club, a regular online stop for me, and noticed a big graph on the front page. They say that 91% of investors earn 6%-18% returns on portfolios over 800 notes ($20,000+). That got me to thinking, could someone use a p2p lending cash stream as an income source in retirement?
The Weighted Average Return
As with most marketing statistics, the ad leaves a lot up in the air. I assumed that the average return of the 91% making 6%-18% is in the dead middle of that range, which is probably high. Assuming that, however, I get a weighted average return of 11.3% across the 800 note club.
Just to be safe, I wanted to do a little sensitivity testing. I also ran a 6% return, 4.5%, and 1% scenario. This analysis assumes 100% principle reinvestment and 100% withdrawal of interest returns.
Cash Flow Possibilities
Depending on your lifestyle goals and portfolio size, you can make a lot of money on a p2p lending platform. According to the Lending Club test, these are the returns of a portfolio of $1 million:
Most of us probably can’t live on $833 per month in retirement based on the worst case scenario. The weighted average case gives you a comfortable $113,000 per year. Remember, based on Lending Club’s claim that 100% of 800 note portfolios have a positive return, you do not have to worry about losing your principle. That makes this a very low risk investment.
To compare with the S&P 500, a standard measure for the overall market return, we have seen an average return of 6.58% (annualized 15 year return). It seems that p2p lending beats that hands down for nearly 90% of investors.
While a $1 million portfolio is a stretch for a lot of us, I did a little backwards math to find out what you would need to make $5,000 per month, or $60,000 per year, in cash flow.
To hit this cash flow level with our weighted average return, you only need $531,000 in your portfolio. That is much more achievable for the average investor than a seven digit portfolio. However, to be safe if you are in the bottom 1%, you would need a $6,000,000 portfolio.
Is This Safe For Your Retirement?
At this point, there is little data on the returns of seven digit portfolios on p2p lending platforms. It is hard to say how you would fare if you put your entire retirement on the line for unsecured borrowers at $25 increments. I would never put all of my eggs in one basket. While you can diversify within your Lending Club or Prosper portfolio, I would not put everything in other people’s hands.
However, based on what is available, it looks like p2p lending could become an important piece of the puzzle for people looking for a retirement income stream. Returns are solid, losses are minimal when you diversify, and you can certainly create a cash flow from your investment.
What Do You Think?
Is a p2p lending cash flow something you would want to use during retirement? Is it something you can use before retirement to supplement your income from your current savings? Are you already using this strategy? Please share your thoughts in the comments.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.