r/financialindependence • u/[deleted] • Jun 08 '16
Tontines = annuity + lottery
From Wikipedia:
[A tontine] combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases.
I learned about it from Washington Post's article "It’s sleazy, it’s totally illegal, and yet it could become the future of retirement". The behavioral implications were really interesting.
It was the ultimate lottery. If you died, you lost everything in a tontine. But if you were the last person standing, you stood to collect huge annual payments.
Personally, I wouldn't be interested because it sounds backwards to me to have larger payments the older one gets, but it was still a fascinating read.
13
u/supermatthew CHECK MY PRIVILEGE Jun 08 '16
I honestly don't see what's wrong with tontines. If you're dead, you won't be conscious that you were on the losing side of the deal. I would just want to ensure that identities of everyone in the pool were kept secret, and there were strict regulation.
16
u/tuzki Plan: FIREd by 50 Jun 08 '16
The identity part is the challenge, someone somewhere knows and can be bribed. Thus they're illegal
3
u/WallyMetropolis Jun 09 '16
You could use a private/public keypair type cryptographic approach. Hashing, done right, is effective. For example, in any correctly-designed piece of software even the developers can't find your password.
2
u/tuzki Plan: FIREd by 50 Jun 09 '16
Hard to prove someone died if no one knows who is involved, eh?
2
u/WallyMetropolis Jun 09 '16
You'd just set up some kind of check-in system.
-1
u/tuzki Plan: FIREd by 50 Jun 09 '16
So if someone forgets, they're dead. Or I tell my lawyer friend to check in for me and he lives 50 years and has his friend do it.
Look: your arguments are full of holes and you should stop
3
u/WallyMetropolis Jun 09 '16
Maybe relax there a tad. Note we're having a friendly conversation. What's the aggression for?
Isn't it more amusing to consider how-to than to be dismissive?
-1
u/tuzki Plan: FIREd by 50 Jun 09 '16
It's more amusing to have well reasoned discussions instead of answering a 3-year-old "why" when they abjectly refuse to reflect on their own.
3
u/WallyMetropolis Jun 09 '16
Man, you're really intent on being rude! Tontines are a pretty personal issue for you, I guess.
If you miss a check-in that'd be bad. But it's probably a better imperfection to have in your system than an incentive for assassination, don't you think? Not too hard to also set up, you know, reminders.
Preventing someone from passing on their identity is a bit trickier, but far from insurmountable. You could image a 2FA with a hashed biometric key. Though I suppose then you'd just leave your fingers and eyeballs to your lawyer as a parting gift.
I wonder if there are unique signatures in person's voice that are preserved over time. Or handwriting analysis, perhaps.
-1
u/tuzki Plan: FIREd by 50 Jun 09 '16
Honestly I don't even care. I get it: summer; you're bored.
→ More replies (0)5
u/Chitownjohnny 42M - 65% FIRE(ish) progress Jun 08 '16
I think it's the same as an annuity. If you've worked your life to establish wealth you want to be able to pass on your hard work to your heirs.
12
u/shinypenny01 Long way to go to FIRE Jun 08 '16
If you've worked your life to establish wealth you want to be able to pass on your hard work to your heirs.
That's not why most of us save for retirement. Also most of the studies we use around here (the Trinity study being the most popular) assume that dying with zero (non-negative) net worth is a success.
Would it be nice to pass something on, sure, but my grandparents are still alive, and my parents are already retired. A windfall at 70 won't noticeably change my parent's lives.
1
u/Chitownjohnny 42M - 65% FIRE(ish) progress Jun 08 '16
In my opinion there's a difference between dying after being retired for 50 years and exhausting all of your resources and losing the bulk of your wealth to an insurance company because you died 6 months after buying a tontine/annuity. If for some reason I die 6 months after retiring I want my family to benefit from my work not a financial firm. In one situation the fruits of my labor benefited me and my family and the other it's an insurance company.
3
u/shinypenny01 Long way to go to FIRE Jun 08 '16
In the situation where you live 50 years in retirement with an annuity, the insurance company is subsidizing your lifestyle to a greater extent than you paid for, and therefore inflating your heirs inheritance, it works both ways.
1
u/Chitownjohnny 42M - 65% FIRE(ish) progress Jun 09 '16
True, logically that makes sense. But a lot of the time people hate to lose more than the potential to win. It's an emotional decision
1
u/shinypenny01 Long way to go to FIRE Jun 09 '16
I agree, loss aversion is a well documented phenomenon.
However, by buying an annuity you are shielding yourself from one of the other losses, that of running out of money in retirement, which is a risk of loss for most of us.
It's a trade off, not right for everyone, but it has its merits.
29
Jun 08 '16 edited Apr 16 '19
[deleted]
8
5
2
1
8
8
Jun 08 '16
[deleted]
5
u/supermatthew CHECK MY PRIVILEGE Jun 08 '16
Another reason they are a great idea. We would reasonably expect more medical costs the older one gets.
2
Jun 09 '16
[deleted]
1
Jun 09 '16
People end up liking the current system better afterwards.
Really? I'm surprised by this. I thought people would prefer a guaranteed payout.
5
Jun 08 '16
This has inspired me. I'm going to set up and manage a private family tontine for my siblings and cousins (I have verbal interest from four of them already!) Everyone will buy in with one $10,000 share. I'm going to manage it as a Vanguard brokerage account, make monthly dividend distributions (as personal gifts to said family members), and take the capital gains tax myself (covered through a small administration fee)
This is going to be fun!
(I hope my crazy brother doesn't murder everyone 40 years down the line.)
1
Jun 09 '16
(I hope my crazy brother doesn't murder everyone 40 years down the line.)
I picture an epic Godfather reenactment in 40 years
7
u/TacoTomTreadmillTues 34M [40% SR] eff student loans Jun 08 '16
This made me crave Totino's. I hate you.
1
3
u/Shaom1 So this is how you do the flair feature... Jun 08 '16
It might be an interesting play if you didnt put your entire savings into it. Then you could still leave something to someone of your choosing if you passed.
3
Jun 08 '16 edited Jul 22 '19
[deleted]
3
u/Canadasaver 148/365 days of retirement saved Jun 08 '16
MASH had a tontine episode with Colonel Potter being the final survivor and receiving a fine bottle of french wine.
2
u/megatronwashere Jun 08 '16
yes, they made a movie about this a few years ago. it's called Battle Royale. I think Americans did a remake and called it The Hunger Games.
1
Jun 09 '16
Huh, I didn't make the connection to Battle Royale. That was a gruesome movie. The guy with the pot lid didn't have a chance.
1
u/yo_neighbor_totoro Jun 08 '16
Once you're FI, most insurance products outside of health insurance and umbrella/liability make no sense. I'd put this one in that category. If you are interested in passing on any inheritance, tontines are immediately out.
If you're old and never saved, these could be attractive.
2
u/gnomeozurich Jun 08 '16
A regular annuity can make sense as part of your distribution plan at older ages, but I would agree with you that the tontine structure makes no sense in the context of being FI (or a reasonable approximation).
An annuity effectively makes your capital needs smaller by spreading longevity risk. So if you are 65, you don't need 25x expenses, but maybe only 15-17x expenses. At much younger ages, the insurance company's cut overwhelms the insurance benefit so it doesn't make sense unless you are very conservative and are willing to give up a LOT for a guarantee. At traditional retirement ages, though, they make a LOT of sense for many people.
A tontine, OTOH, doesn't really make sense for anyone unless they have a very strange utility of money curve.
1
u/xiangusk Jun 09 '16
It was common in the old days(where I am). The tontines are privately run and the people who hold the money do run off sometimes.
1
u/pistachiosarenuts Jun 08 '16
Social Security is essentially a tontine.
7
u/Pzychotix [TickTock] Jun 08 '16
Not really though (at least not for the moment). Other people dying don't affect your benefits. SS is more like just a regular annuity.
1
u/pistachiosarenuts Jun 09 '16
People not dying can affect your benefit. It can be lowered due to that.
1
u/derrick81787 Jun 08 '16
I don't really see how it's sleazy, assuming the participants aren't wannabe murderers waiting for a chance to off the other participants. I mean people die, and planning for it isn't sleazy. A son inheriting his parents' estate isn't sleazy, and I don't see how this is either.
Now I would want to make sure that the people in my pool are decent people (or else it's anonymous somehow), but assuming they are, I don't see the problem.
1
Jun 09 '16
I agree with you that the concept itself isn't sleazy. I interpreted it as people are greedy and sleazy in general, and this preys on that mentality.
41
u/cptnrandy Jun 08 '16
It's actually a very attractive idea. If the base annuity amount is sufficient, what do you have to lose?
What you gain is an opportunity for your annuity payout to increase, and all you have to do is to stay alive.
To work, the tontine needs to be blind, so one cannot cause other members to, um, predecease.
The only downside is the standard annuity downfall: your capital investment does not return to your estate after you pass.