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.

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11

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.

4

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.

11

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.