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Tontines 101: How and why an illegal scheme could be just what modern retirees need




A pile of hundred dollar bills lay flat on a table.
A pile of hundred dollar bills lay flat on a table.
Ryan Schmitz/Flickr

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If you just read the title of this article and are now asking yourself what the heck a tontine is, you’re not alone.

The archaic retirement scheme (pronounced 'tawn-TEEN') was popular during the 18th and 19th centuries, reached its peak at the turn of the 20th century, and has been illegal ever since, thanks to a spate of scandals. Scandals, you ask? Indeed. You see, the concept of a tontine is kind of...unsavory.

Here’s how it works: Let’s say you and nine of your friends chip in $10,000 each to buy a large pool of stocks or mutual funds or something. Every year, your group takes out a chunk of money and distributes it evenly among all the members of the tontine.

But here’s the catch: when a member of the tontine dies, that person’s annual share is distributed evenly to the remaining members of the tontine. So, quite literally, you get more money if you outlive your friends, and depending on how you look at it, it’s either a great way to make sure that your money is helping others when it can’t help you anymore, or it’s an incentive for murder.

As you might imagine, based on the concept, a tontine is a great device to use in film or TV, since you can create an elaborate murder plot out of one.

But an increasing number of economists and lawyers are saying that tontines, with a few new-age hacks, might actually provide a simple solution to some of the biggest issues retirees face, like outliving your retirement money. Some estimates say only about 33 percent of Americans are well-prepared for retirement, so while the idea of a tontine might seem slimy, some are saying it could be the shot in the arm America’s retirement system needs.

Do you think tontines could ever see a revival as a form of retirement investment in America? Would too many people be put off by the principle? What tweaks could be made to the traditional tontine to make it more suitable for use in the 21st century?

Guests:

Moshe Milevsky, finance professor at the Schulich  School of Business at York University in Toronto, Executive Director of the Individual Finance and Insurance Decisions Centre (IFID Centre), and author of “King William’s Tontine: Why The Retirement Annuity of the Future Should Resemble its Past” (Cambridge, 2015)

Michael Kitces, partner and the director of research for Pinnacle Advisory Group, and publisher of the financial planning industry blog “Nerd’s Eye View.”