Saving for retirement used to be a relatively easy thing to do, whereby employers and the government often essentially guaranteed a lifetime income. This has changed as life expectancy in Europe has climbed, along with an ageing population making it less sustainable. There has been a shift in the responsibility for retirement planning away from employers and the state, toward the individual. Knowing how to save for retirement, and especially early retirement, isn’t something most know how to easily achieve.
As such, in this post, we’ll look at how P2P lending in Europe can be a strong consideration for anyone that wants to retire early, while keeping sound investment principles as part of their strategy and risk appetite.
What Is P2P Lending?
In the classic sense, P2P lending is an online facilitated environment that links people that want to lend money with people that are willing to lend. Most common form of P2P lending, however, is investing in pre-funded loans – lending companies who has already issued loans to their customers sell the claim rights to these loans to help finance their business. Claim rights buyers or investors, on the other hand, gets interest for lending their funds to such businesses. This environment is completely market driven and often free of regulation found in the banking sector where many people are unable to obtain capital.
In Europe, P2P lending began in the United Kingdom after the 2008 financial crisis when banks were facing severe difficulties that led to a near complete dry-up of capital to consumers and businesses.
Since then, Medium.com reports that Europe has seen a dramatic growth trajectory in P2P lending activities with overall trade reaching 6 pillion pounds in the UK in 2018. The year 2020 has however been the exception with worldwide lockdowns that plunged most of the world’s local economies into recessions.
Today, Firehub explains that there are plenty of European P2P lending platforms offering great returns. Many of them have withstood the test of time and have become serious investment alternatives to banks, bonds, and even stock/security exchanges.
How Risky Is P2P Lending for Early Retirement?
The first thing to keep in mind, no matter the investment channel you choose, is to never put all your eggs in one basket. Even when it comes to P2P lending, do your research about your chosen P2P provider and also try to spread your risk by investing in more than one initiative.
According to Retireby40, the default rate is approximately 2.4 percent for top rated lenders, which is not bad when it comes to measuring risk. Very high risk lenders however do carry a risk of approximately 11 percent, but that comes with a great earning potential. This is why it’s important to carefully study the risk rating the P2P platforms give you.
P2P Lending When Compared to Traditional Banking
European P2P lending offers a great advantage over traditional banking products, simply because the returns are completely different and the environment is much less regulated. Your retirement needs should consider the viability of a sustainable return on investment.
According to Cliff D’Arcy, the financial crisis of 2008 led to record low interest rates and this filtered through to the earning potential of fixed deposits. He points out that in contrast, P2P lending on average gives you a return of between 3–7 percent conservatively.
The cost of living keeps going up and inflation erodes any real-term potential of your money in the bank; traditional banking just does not keep up. This means you need to save more as the expectation is that your money will essentially stand still if traditional banking is your only option.
According to Jeangalea, some European P2P lending platforms produce an average 11 percent per annum earning potential. This is a great leap when you consider that inflation according to the International Monetary Fund averages to 0.8 percent per annum.
How Much Should You Save to Retire Early?
Many investors find this question hard to answer as every person is different. Cliff D’Arcy explains that your retirement needs are impacted by:
- Over how long a period you invest,
- How much of your income you set aside,
- The returns your contributions (and those of your employer, if you have one) earn,
- The charges levied on your retirement fund,
- The age at which you decide to stop working,
- Which retirement product(s) you decide to use,
- How long you live after retiring,
- Interest rates and investment returns during your retirement.
For early retirement however, there is a formula to help you estimate just how soon you are able to retire. According to p2pincome.eu, the average rule of thumb is that you should ideally not withdraw more than 4 percent of your savings per annum.
To reach your early retirement goal, some estimates are that you need to save 50 percent of your current earnings just to keep up with your present lifestyle. So, depending on where you are in Europe, you would need to calculate just how much you need for you to sustain your lifestyle and keep it in line with the estimated life expectancy you could reach.
How is P2P Lending Doing in 2020?
One thing that 2020 has taught us is that we need to plan for the unexpected and that we definitely must be willing to adapt. Like everything, P2P lending has been affected by the current world situation, but there are indications that growth is returning faster than initially thought.
According to Silicon Canals, the downturn experienced between February to April 2020 has already bottomed out with over 43 percent of platforms showing volume increases since May 2020. This kind of quick rebound is a good indication of the resilience P2P lending offers.
Sifted.eu reports that there is still a rocky road ahead for P2P lending, especially considering the effects of the lockdowns implemented across the globe. Different countries will respond in various ways as to how economic activity will be stimulated. European growth is expected to remain flat for 2020.
On a positive note, Sifted.eu does however predict from one of their sources that P2P lending will nonetheless grow by 12.2 percent in 2020. This alone makes it imperative to consider including P2P lending in your early retirement strategy as this offers way more growth than many other investment avenues.
Also, as P2P lending volumes grow, industry has been shaken by few scam cases, so majority of serious market players including VIAINVEST have started the licensing process to set unified rules for all market players and guarantee safety for their investors. More information about the P2P industry licensing process in Latvia can be found here.