A crazy scheme from the 1600s that banks outliving your peers could be the next big thing for retirees

Black plagueWikimedia CommonsSaint Sebastian Interceding for the Plague Stricken

Tontines could be the future of retiring in the US.

A report from the Washington Post’s Jeff Guo on Monday introduced us to this seemingly hair-brained scheme that at least some people think might be the future of retiring in America.

So what’s a tontine? Basically, it is a pool of money you get back over time.

To join a tontine, you pay into the pool and then at regular intervals get some of that money back. So it’s sort of like an annuity: you pay up front and get your money back in regular installments on the back end.

But here’s the thing: when people in your tontine die, the pool stays the same size, which means your regular payment goes up.

Say, for example, 10 people pay $US1,000 into a tontine to each get an annual $US100 payment in perpetuity after the age of 60. Now, if one of these people dies, instead of that person (or their heirs or whatever) getting their money back, your payment as a living member of the tontine goes up to $US111 (roughly).

Said another way, the annual $US1,000 payment that was divided 10 ways will now be divided nine ways since one member of the pool died. This means you make money from the death of others.

So a tontine, then, is not only a bet that you’ll live for a while — meaning it makes sense to give someone a bunch of money in exchange for regular payments over a number of years in the future (which is what an annuity does for you, more or less) — but that other people will die before you do.

Instead of taking out an annuity, which in investing slang would mean you’re “going long” your own longevity, a tontine makes you both “long” your own life and “short” the lives of others. As Guo writes, a “morbid principle.”

Now, tontines are not new and not legal, with Guo tracing their origin back to 1600s.

But with some estimates putting only one-third of Americans on the track towards retirement, a radical solution might be what the economy needs. Or at least what some Americans may need to make it to and through retirement.

As one professor put it to Guo, “This might be the iPhone of retirement products.”

Read the full report at WaPo here »

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