Americans simply do not save enough for retirement, that’s the inescapable fact. The latest survey on retirement savings shows that more than one-third of working age Americans have not saved any money for retirement. Even worse, 14 percent of people age 65 or over have no retirement savings whatsoever. In the July-August issue of Harvard Business Review, Nobel Prize laureate Robert Merton analyzes the issue in-depth, calling it a “crisis in retirement planning.”
While the financial services industry continues to produce a number of incremental improvements to existing retirement options, has there really been a major, game-changing innovation since the first 401(k) plan was unveiled nearly 30 years ago?
What follows below are five ways that a combination of technological and financial innovation might help solve America’s looming retirement crisis.
1. Financial nudges
Behavioral finance is showing that most people are not nearly as rational when it comes to money matters as economists have historically claimed. And the field of behavioral finance is coming up with some really interesting ways that policy planners can help everyday people overcome their aversion to saving for retirement by a combination of behavioral cues (also called “nudges”) that compensate for the poor choices made by the irrational brain. Policy planners essentially become “choice architects,” helping you make the right choices for retirement.
Back in 2008, Richard Thaler and Cass Sunstein of the University of Chicago literally wrote the book on nudges. What they claimed was that a simple “nudge” — for example, making signing up for a 401(k) or pension plan an opt-out rather than opt-in event for new employees — could make a huge difference in getting people to save for retirement. And there are plenty more informational nudges — like this creepy Face Retirement experience — that could gently prod you to complete certain retirement planning tasks at the right time. The good news is that governments around the world are paying attention and actually implementing these ideas.
2. A re-engineered 401(k)
According to some financial theorists – including the same Robert Merton who wrote the retirement crisis article for Harvard Business Review – the whole concept of the 401(k) may need a rethink. Instead of focusing on return on investment, retirees should be thinking about the entire risk profile of their portfolio (including longevity risk and inflation risk) and their portfolio’s ability to deliver a specific level of retirement income. In a lecture delivered at Princeton University in 2011, Robert Merton highlighted how financial derivatives might be one way to counter these risks and create a “next generation solution for funding retirement.”
And this type of thinking appears to be gaining traction. One solution, supported by the Obama administration, is something called a longevity annuity — a product that pays you a certain amount of money each year if you live past a certain age (usually 80 or 85). In a bit of financial sleight-of-hand, your existing retirement account is converted into an annuity, guaranteeing a steady flow of money if you live longer than expected. Of course, these bells and whistles come with a caveat of their own. If even professional investors have a hard time making sense of futures, options and swaps, what chance does the average investor really have?
3. Tap the sharing economy
People typically associate the sharing economy with twenty-something hipsters, but when the AARP came out with a video promoting the sharing economy last year, you know there might just be a future in the sharing economy. In the AARP video, George Takei (of Star Trek fame) outlines all the ways a retiree might use sites such as Airbnb or Lyft to make some extra income. Rent out extra room, share a car you don’t use, maybe even share all the physical assets you’ve accumulated after a lifetime of working.
And there’s another way the sharing economy could be used to help you fund your retirement. Using a site like TaskRabbit, a retiree could theoretically sign up to do the little chores that others might not want to do – like house sitting a cat during a vacation, picking up laundry, or helping someone move. It may not result in huge financial gains, but finding local jobs in the community that need to be done on a regular basis might be one way to supplement already-depleted retirement savings.
4. A crowdfunded retirement
The conventional way to think about crowdfunding is that it represents a new asset class, meaning a new way to diversify your retirement portfolio beyond just stocks and bonds. The JOBS Act of 2012, some say, essentially turned crowdfunding into a new asset class, giving regular people a chance to invest in exciting new business ventures, the same way deep-pocketed venture capital firms invest in start-ups. While there’s a lot of upside if a company really takes off, there’s also a chance that your investment goes nowhere.
But let’s think big – really big. While most crowdfunding sites require you to post a creative project for financing, there are some crowdfunding sites like GoFundMe that enable you to raise money for personal causes. Why not crowdfund the retirement of someone in your family? Set up an account, film a video, upload a few photos, and get friends, family and social media followers to chip in $25, $50 or $100 at a time.
5. Human capital contracts
It’s becoming increasingly possible to invest in the future income of up-and-coming superstars. Find a hot prospect — maybe a budding tech entrepreneur or a creative genius — and invest in them in exchange for a share of their future earnings. They’re called “human capital contracts” — and companies like Upstart and Pave let you invest in the future careers of others, especially those graduating from elite universities with lots of educational debt but also lots of earnings upside. These bright young things get your money early in life when they need it most, and you get their money later in life when you need it the most.
That’s a win-win for everyone, right? Well, some say these human capital contracts sound like an indentured servitude contract, where vulnerable recent grads take on even more obligations in a desperate attempt to pay down a crushing mound of student debt. Others refer to these human capital contracts as a new form of artistic patronage. At any rate, they potentially represent a unique way to diversify your retirement savings, maybe even giving you a chance to make more money than you might with a standard mix of stocks and bonds.
At the end of the day, the United States could be facing a Baby Boomer retirement disaster. Some have even suggested that the federal government might need to completely overhaul Social Security in order to guarantee a certain level of income throughout the lives of America’s elderly who failed to save enough for retirement. Maybe. However, it seems like there must be a way to use the nation’s best financial and technological know-how to come up with new ways to radically change retirement that don’t just involve dumping more government money at the problem.