Wednesday, September 30, 2015

Do Tontines Have a Valid Role in Modern Retirement Planning?

Jeff Guo, writing for the Washington Postrecently offered a provocative look at "tontines" as a theoretical retirement planning alternative to "annuities." Apparently these are advocated by some modern legal and financial experts:

Economists have long said that the rational thing to do is to buy an annuity. At retirement age, you could pay an insurance company $100,000 in return for some $5,000-6,000 a year in guaranteed payments until you die. But most people don’t do that. For decades, economists have been trying to figure out why....

 

But there’s also some evidence that people just irrationally dislike annuities. As behavioral economist Richard Thaler wrote in the New York Times: “Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even.”

 

Here is where tontines come in.  If people irrationally fear annuities because them seem like a gamble on one's own life, history suggests that they irrationally loved tontines because they see tontines as a gamble on other people's lives.

 

A simple modern tontine might look like this:  At retirement, you and a bunch of other people each chip in $20,000 to buy a ton of mutual funds or stocks or whatever.  Every year, the group withdraws a predetermined amount and divides it among the remaining survivors.  You might get a bonus one year, for instance, because Frank and Denise died....

 Want to know more?  Read It's Sleazy, It's Totally Illegal, and Yet It Could Become The Future of Retirement.  Hat tip to David Pearson for sharing this story. 

https://lawprofessors.typepad.com/elder_law/2015/09/do-tontines-have-a-valid-role-in-modern-retirement-planning.html

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