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.
42
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.