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The Tontine Retirement Income Solution

Tontine is an investment in which individuals pool their money and from which each receives income for as long as they live, with the payout entitlements of deceased participants accruing to the surviving participants.

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    The Tontine Retirement Income Solution

    The Tontine Retirement Income Solution

    Tontine is an investment in which individuals pool their money and from which each receives income for as long as they live, with the payout entitlements of deceased participants accruing to the surviving participants. Its origins go back to the 17th century.

    While they proved to be quite popular in the U.S. during the 19th century, tontines became subject to stringent restrictions at the turn of the 20th century due to abusive practices by life insurers.

    Given the difficult financial challenge of converting investment assets into a predictable and secure stream of lifetime retirement income, it is unsurprising that tontines are experiencing renewed interest from individuals and insurers, alike.

    The Time for Tontines?

    A tontine has the advantage of offering guaranteed lifetime income, similar to an annuity, as well as the ability to increase payouts over time to offset the loss of purchasing power of fixed payments.

    There are a number of ways tontines could become available to retirees, including:

    • A state-sponsored tontine pension assurance fund in which it would act like a defined-benefit plan (calculating mortality risk and lifetime income), but without promising a specific benefit amount (and avoiding the DB liabilities for the sponsoring state); this tontine fund would act as a complement to regular investment funds
    • Individual tontine accounts in which investments are directed by the individual and, in the event of the accountholder’s death, the proceeds would be paid to the surviving tontine pool participants
    • A pooled arrangement much like current annuity products

    Tontines are not as radical as they may sound. For instance, the European Union permits tontines; in fact, the pension for SwissAir retirees is structured as a tontine, while Sweden’s national pension system redistributes the accrued pension wealth of the deceased among all survivors of the same age cohort. Canada enacted tontine-enabling legislation in 2019.

    Even in the U.S., TIAA-CREF has allowed investors to participate in a pooled life annuity fund where mortality risk is shared and guaranteed by the fund. Just don’t call it a tontine.

    Hurdles to Clear

    There are a number of hurdles for tontine advocates to clear if the product is to go mainstream—not least of which are legal obstacles at state levels. For instance, a few states prohibit tontines outright, and New York law prohibits tontine investments that pay out less frequently than once a year.

    While tontines—like any investment product—may not be appropriate for all retirees, nor be a one-stop solution to the retirement income challenge, it does represent a compelling potential product that may increase the financial security of a new generation of retirees.

    Please reference disclosures at: https://blog.americanportfolios.com/disclosures/

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