Decumulation: FinTech’s Unsolved Challenge

TOM SHORT
MIKE MA

April 22, 2020

As defined benefit plans disappear from most companies’ retirement savings options, future (and many current) retirees need to plan on accumulating and investing enough so they can, in effect, create their own annuity that will get them through their retirement without running out of money. For many, their retirement funding will include some combination of social security, investment returns, and regular withdrawals from their investment portfolio. 

This growing reality for many retirees creates a wickedly complex planning challenge, much more so than the planning required during their accumulation stage. The complexity is mainly driven by the need to partially fund retirement expenses through regular withdrawals from their investment portfolio, a process dubbed decumulation

Despite billions of dollars of investment in FinTech by VCs and large financial institutions alike, when it comes to retiree advice and decumulation, much of the available advice is still based on nostrums like:

With more and more retirees looking at a decades-long active and healthy retirement, greater sophistication is needed to cope with longevity risk, end of life medical care, estate planning, social security claiming strategies, calculating and adjusting a safe withdrawal rate, and more. In 2020, we can do better. We have to do better.

The first robo-advisors were launched in 2008 during the financial crisis. These software-based investment platforms have been a boon to professional advisors and brokerages by automating much of the manual work involved in portfolio construction and management, increasing individual advisor productivity, and freeing them up to provide more personalized advice and service. All the while they continue to charge fees based on a traditional AUM (assets under management) model.

Individual investors also benefited greatly from these platforms, which allowed a “set it and forget it” approach to managing and maintaining a complex investment portfolio based on only a few inputs like risk tolerance, age, and target retirement date. 

The robos worked great for both advisors and investors during the accumulation phase when investors were building their retirement nest eggs. But what happens when that retail investor decides to retire? What happens to the AUM business model used by brokers and advisors when the focus shifts from accumulation to decumulation drawdown? And for the retiree, where is the robo-advisor to help them not only develop their retirement decumulation strategy, but then continuously make course corrections based on the numerous and inevitable ways in which the initial inputs and conditions will change over the course of a decades-long retirement?  

None of these are addressed by a single, dedicated decumulation application, and the limited services that touch on some of these items operate on the AUM fee structure among a customer base that is particularly sensitive to fixed recurring costs.

There have been a few attempts at addressing decumulation for retirees. Kindur, a roboadvisor for retail investors, recently began offering a decumulation service called Silvur, specifically targeting baby boomers who are near retirement or already in it. For a flat annual fee, Silvur offers retirees a number of features including a monthly paycheck drawn from the retirees’ accounts, tax planning and minimization, payment of Medicare premiums, required minimum distribution (RMD) planning, and more. 

Blueprint Income offers their personal pension product to people who are still working, providing them with a way to fund their own defined benefit pension via monthly contributions. They also act as an annuity screener, providing one-stop annuity shopping for anyone, primarily focused on retirees. The platform eliminates the complexity of annuity shopping that many investors complain about.

Tontine Trust is another innovative FinTech aimed at retirees. It is built on the centuries-old concept of a tontine, a risk pool of contributions from an initial cohort of similar-aged retirees that is invested and used to provide the participants with a monthly paycheck. As participants die off, the monthly paychecks increase for those who are left. Tontines were immensely popular in the United States a century ago, but were outlawed due to mismanagement by the insurance companies that offered them. Today, with blockchain technology, companies like Tontine Trust are once again taking a look at this ingenious approach.

Each of these tries to solve the decumulation challenge facing retirees by de-risking drawdown through a known, fixed return, thereby removing the risk of running out of money. The trade-off for the retiree is missing out on the potential upside in the case of a decades long bull market run, whereby their initial nest egg grows some number of times larger, even with regular withdrawals. 

There has to be a better way

Ultra-high net worth individuals and families have “family offices” comprised of dedicated financial teams responsible for managing the complexities of their accumulated fortunes. Where is the equivalent of an automated family office that provides that level of financial service for the masses? 

How about a budgeting tool that monitors a retiree’s spending across all their accounts and automatically tracks their glide slope and recommends spending or investment goal adjustments? 

How about a FinTech solution that uses a blockchain distributed ledger approach to creating a tontine, providing a decentralized, low-cost, low-risk, secure annuity product for cohorts of similar-age retirees, and builds in budget and expenditure tracking with recommended adjustments? 

Corporate Innovation – your organic growth engine

These are just a few examples of white space opportunities related to decumulation that we’re monitoring. They are the basis for the very type of FinTech startup that Nex Cubed loves to work with, nurturing them with the expertise and exposure to funding opportunities they need to become successful. 

Nex Cubed has the in-house expertise and resources to help FinTech startups progress from idea to execution to revenue. We also offer this same expertise to corporate innovation groups, helping them turn their innovations and ideas into sources of organic growth and competitive advantage.

Want to learn more about how we can support your innovation effort? Check out our Corporate Innovation Program offering here or click here to contact us directly.

Tom Short is a strategic advisor at Nex Cubed and Principal at Tom Short Consulting where he provides strategic messaging for startups and non-profits. Mike Ma is Managing Director of FinTech at Nex Cubed.

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