This Retirement Plan Is Creepy and Illegal, But It Just Might Work…
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If your piggy bank breaks, your IRA investment tanks, or you simply fail to save for retirement, there’s still one option left: Bet on your longevity.
An old-timey retirement scheme called the tontine might be coming back into style. While this once-hip model for funding your future was largely shunned at the advent of modern insurance companies, some experts claim tontines could again be a viable option for retirement planning.
But first, a quick look at how this crazy scheme works.
It’s sort of like the ultimate form of schadenfreude: You make an investment. A bunch of other people make the same investment, and as the investment grows, you all get paid on a regular basis.
But as people in the group die, the pot grows — meaning if you outlive your investment partners, you’re going to end up with more money.
It’s that easy. All you have to do is wait for everyone else to die.
Your Middle-Ages Retirement Plan
The practice dates back to the Middle Ages, when governments would seek investments from their citizens to fund wars. Tontines worked like a juiced-up version of an annuity, where a loan is paid back in increasing amounts each year until your death.
“It was the ultimate lottery. If you died, you lost everything in a tontine,” Jeff Guo writes in the Washington Post’s illuminating history of the practice. “But if you were the last person standing, you stood to collect huge annual payments.”
Remember, it was the Middle Ages. You were lucky if you made it to 40.
The American tontine model reached its peak around 1900, and is often thought to be the predecessor to modern insurance policies. But many of these plans were corrupt.
“There was rampant shadiness back in the day,” Guo notes. Tontines got lumped in with the sins of gambling, and states started to outlaw them, starting with New York in 1906.
Return of the Tontine?
Some academics are campaigning for the tontine’s return as a viable retirement option. In theory, it would be most ideal for people without children or others they would want their money to go to when they died.
If you bought into a tontine and were one of the first to fall to the Grim Reaper, your money would at least be going to the other people in your tontine, to make their retirement more comfortable. The money from that annuity insurance policy wouldn’t be lost to the insurance company.
A tontine model could also work to replace today’s pensions.
“Instead of setting aside so much money to make sure all the pensions are fully funded, why not let the pension payouts vary?” Guo writes.
“If people are dying faster than anticipated, redistribute their shares so that the remaining pensioners get slightly larger checks. If people are dying slower than anticipated, shrink those pension checks a bit.”
With an aging population that’s living longer than ever before, it’s definitely time to start thinking about alternatives to typical retirement options.
Moshe Milevsky, finance professor and author of King William’s Tontine: Why The Retirement Annuity of the Future Should Resemble Its Past, told MarketWatch earlier this year that the ideal tontine scenario would require “approximately 500 investors in a ‘village’ around the age of retirement banding together” with the aid of an impartial advisor.
Milevsky has been working on selling people on the tontine idea for a while. In one 2014 interview, he likened alternative retirement plans like tontines to a new normal:
“You used go to work and get a cubicle, a couple days of vacation, a chair and a pension. Today it's not like that. Now saving for retirement is like saying you have to bring your own chair to work. It's a new reality, and today you have to manage your retirement yourself.”
Fraught with indecision, I took to Twitter to ask Washington Post reporter Jeff Guo, unofficial tontine historian, if he would choose a tontine as a means of retirement cash. After all, I’m sure he’s spent more time considering this method than I have. His response:
— Jeff Guo (@_jeffguo) October 7, 2015
Before You Sign up for a Tontine, Check out Family Pools
But let’s be real: In a post-modern tontine aided by technology, you’re unlikely to know your investment group, therefore preserving yourself from the low threat of investment-fueled murder. It’s just the idea that’s creepy.
The simple idea of hedging a bet on your life over someone else’s is the exact opposite of a family pool, where a community agrees to contribute a certain sum each week or month, with one party in the pool receiving the entire pot on a rotating basis.
It’s not meant for retirement, but more designed for saving for large purchases with a supportive group.
This form of community saving ensures that everyone is taken care of equally over time. You know everyone involved, so if someone in the group were to die, you’d probably give that person’s share back to their family.
But who knows — maybe some combination of family pools and tontines will be the new, new normal by the time I’m ready to retire.
Your turn: Would you sign up for a tontine?
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Lisa Rowan is a writer, editor, and podcaster living in Baltimore.