A call to fintechs to help stave off a retirement crisis
Helping Americans prepare for retirement is a $14 trillion opportunity most fintech startups are missing out on as they focus on the needs of millennials instead of older Americans, according to Ben Cukier, co-founder of Centana Growth Partners.
Cukier has been investing in fintech startups since before fintech was a thing. Previously he was a partner at FTV Capital, which also focused on financial services and fintech, and he worked at Madison Dearborn Partners and McKinsey & Co.
The following is a transcript of a recent interview with Cukier. It has been edited for length and clarity.
Do you think about the issues around retirement in this country? There are so many people who are unprepared for it, and it seems the traditional banking system isn't doing a lot to help people who don't have a lot of retirement savings or or a 401(k), perhaps because they’re unemployed or have a gig-economy job.
BEN CUKIER: I’ve been thinking about it a ton. The average baby boomer has $100,000 in liquid net worth. The life expectancy of a 65-year-old male is 20 years, and for a female it’s 22 years. So there's a huge deficit in savings. That statistic doesn't include things like home equity or the value of small businesses. Over the next couple of decades you'll see baby boomers retire, sell their small businesses, liquidate their illiquid assets, and then figure out how to tap the equity that's in their homes.
If someone gets to 65 and they have no money, I don't think there's much the banking system should be expected to do for them. At that point it's more a societal issue. I think you'll see a lot more people not retiring — or working much, much later. A lot of baby boomers want to do this. The whole idea of retiring at 65 came about when the life expectancy was probably about 10 years shorter and the quality of life close to that age was significantly less than it is today.
To your point about people tapping equity in their homes, are you expecting a big boom in reverse mortgages?
Reverse mortgages are one possible solution to that. There are some other interesting solutions the fintech world is coming up with. There are a number of players that allow the sale of an equity portion in the home. Homelink is one. They offer innovative solutions that may address some of the problems with reverse mortgages
Because reverse mortgages have a reputation of being kind of a rip-off, right? Do these alternatives offer something better?
Reverse mortgages have a reputation for being rip-offs because providers historically charged very high fees. There is the possibility of getting a reverse mortgage from a provider that has lower fees and fairer terms and conditions. These new players, which are buying equity stakes in the homes, have a stated goal to do this at a lower fee, in a more fair way. They're young, so we’ll need to see how they develop.
If you step back and think about the retirement problem, there are three financial issues a retiree faces. The first is, how much money do I have? The second is, what are my unplanned expenses? (The two largest are health care and long-term care.) The third is, how long am I going to live?
That's a huge problem. There's huge variability in longevity. If you know you're going to live for five years rather than 40 years, that changes how you spend and save. The issue is, of course, you don't know and you don't want to run out of money. Even someone who has saved well and has a lot of assets needs to be able to plan for this uncertainty. This is one of the problems with the demise of the pension. The traditional pension took up that longevity risk and averaged it out over a whole pool of people, so you knew with certainty how much money you were going to get, assuming that the company that gave you the pension stayed in business. It made the planning much easier and more tax efficient.
It shifted in the 1960s and 1970s; it's been phasing out over the last 20 years. But if you ask the average worker, do you want a 401(k) or a pension, the vast majority would rather have a pension.
It's impossible to plan for longevity on your own. That is really a pooled-risk product. And speaking of bad products, there is an industry out there that does promise a lifetime income and insurance product called an annuity. The reputation that annuities have makes reverse mortgages look pleasant. But there's no inherent reason that an annuity needs to have a high load on it. It is actually one of the ideal solutions to that longevity problem, if you can get an annuity packaged in a way where it's low fee and ideally put into a 401(k) account so you can get pretax treatment in plan. There's a new bill working its way through government that's going to allow employer-plan sponsors to put annuities in the plan that has the potential to revolutionize retirement planning for the next generation.
What does all this mean for you as a venture capitalist? Is this informing some of your investment decisions? Are there companies you feel are doing something smart?
Absolutely. We're spending a lot of time looking for who can help solve the problem. One of the earlier investments I was involved with is a company called Financial Engines. I haven’t been involved with them for years, but they've done some phenomenal stuff to help advance this cause. There are some new players out there like Unison that have raised venture capital, not from us, and they're doing some innovative stuff. And there's a whole new generation of firms that are just starting to realize that the baby boomers are actually where the money is. The first wave of fintechs addressing retirement have all aimed at the millennials, a problem that's 40 years off. The stark reality is millennials today don’t have any money and won’t for 10 years. That’s outside the investment horizon of most VCs.
If you want to attack money, there's $14 trillion in retirement accounts and probably more than that in homes that will need to be liquidated, small businesses, etc. You're talking tens of trillions of dollars in baby boomers’ assets that move from the accumulation to the decumulation phase over the next decade, and all that money's in motion. Smarter fintech firms go to where the money is and where the money's going to be moving. Anytime you have trillions of dollars of money in motion, there's opportunity.
You mentioned Financial Engines and said you're no longer involved with them. Why are you no longer involved with them?
That was an investment my former firm had made in 1999. It went public in 2005. I am no longer with the firm and they have long ago sold the equity in that.
So it's not that you lost faith in them or something?
No, not at all. It was a very successful investment and the company continues to be incredibly successful.
You also mentioned that you think Unison is doing innovative things.
Unison is focused around equity purchases in homes. Rather than a reverse mortgage, they let the consumer sell a portion of equity to them. That creates interesting dynamics where the person who provides you money now has an incentive to make sure your home appreciates in value.
It sounds like overall you feel this is an opportunity that's being missed.
I do. The fintech world is largely unfocused on this area. They're starting to, and there are a few other interesting companies in the space. There's another firm called Kindur.
I recently spoke to and wrote about them and about FinHabits.
FinHabits is interesting as well. They're focused on the minority aspect of retirement savings.
One of the most important things that you need with any 401(k) program is education. Nobody wakes up in the morning and thinks I want to put more money into my 401(k). And the behavioral economics that go into getting somebody to actually think about retirement when they're 20, 30, or 40 are challenging. That's one of the things Financial Engines figured out early on. A lot of it goes around just defaulting people into the 401(k), and letting them opt out rather than opt in — your participation rates in 401(k)s change dramatically.
What do you think about startups like blooom that let people fine tune their 401(k) through an app? Is that useful?
I don't know blooom that well, but I do know that the best-performing 401(k)s for workers in the long run are ones that people don't mess with. The best strategy for a 401(k) is maximize your contribution, put it in a long-term balanced fund and only change it when you get closer to retirement, to shift the balance from riskier to less risky assets. Target-date funds do that well. I am skeptical of the average person trading and fine-tuning their 401(k) plan.