* Every time somebody dies, that person’s share is liquidated and the cash divided among the remaining folks.
Aye, thar’s the rub, for me anyway.
So, my best friend, a reasonably healthy 75 year old, invests $1M. The next week he goes in for a routine colonoscopy, suffers a perforated colon, develops an infection, and dies.
Or, he’s hit by a truck.
What’s the widow to do?
Asking for a friend.
Simple: you don’t put all your money in something like this.
The purpose of a Tontine (as I see it) is purely for covering longevity risk.
Same with any annuity.
e.g., say you’re 65 and retiring. Congratulations.
First, any money you want to be left in your estate, do something else with. Give it away or set it aside.
Then you start the problem of funding your retirement with the remainder.
Take 10% of your money, maybe 15%, and put it into a tontine.
That completely covers you from age 85-120+, however long you last.
For the other 85-90% of your money, spend it at a rate that it’s all gone over 20 years.
That is a very much better level of income, both before and after age 85, than you get with any SWR approach…and you can’t go broke.
Plus, your income rises in real terms over time. For as long as you live you feel like a genius.
Also, remember that a tontine is age matched.
If your friend were doing this, everybody else in the group would be about age 75 as well.
He might be unlucky not get all that many years of payments before he croaks, but the payments will rise very rapidly.
(in real life, people typically join a tontine at a younger age)
The age matching can be done with fancy statistics on payouts rather than making sure all entrants in a pool meet age range requirements.
i.e., you have people of all ages in one big pool, but the sizes of the payouts each member gets get are a function of their life expectancy.
But then the math gets nasty and people don’t understand and trust the system.
The fund starts depending on the accuracy of mortality tables, rather than merely being a mortality table.
I’m a big fan of simpler solutions that can’t go wrong.
Pool 1: you have to be male and at least 60 years of age.
Pool 2: you have to be male and at least 65 years of age…
Pool 15: you have to be female and at least 60 years of age.
Pool 16: you have to be female and at least 65 years of age…
There is nothing prohibiting being “too old” for a pool. You’re just giving a statistical edge to the other participants.