Numerous factors have helped increase human longevity. Many of us will live to be 90, and some perhaps even 100 or more. Unfortunately, in our younger years, many of my fellow Baby Boomers were not particularly focused on the possibility of living 35 years past retirement.
Followers of my writings know my mission is to help my generation “Live Better, Longer”. With that in mind, one of the drums I beat most loudly is the need for guaranteed lifetime income.
For many of us, Social Security is the only source of income we can’t outlive. Pension plans are going the way of the dinosaurs. The only other financial instruments that can create an income stream we can’t outlive are annuities.
But traditional annuities are becoming increasingly complex as insurers try to cover all the bases. Attempts at including inflation protection are expensive and (can be) off-putting to some consumers. Add to that the well-funded “educational” campaigns by so-called “experts” and pundits, who eschew annuities and declare that no one should ever buy one.
As I mentioned in previous columns, most people prefer a sure thing to a maybe. Once they understand how something works, and believe it will help meet their objectives, those same people usually choose simplicity and guarantees, and are better prepared to face the uncertainties of the world in which we live.
What are these uncertainties?
For one, prolonged low interest rates are likely to continue long into the future. The equity markets are overdue for a correction and investment returns are predicted to be lower in the future than in previous decades. No one knows for sure; not even the highest-paid investment managers on the planet know.
Furthermore, while none of us knows how long we are going to live, there is that increasing probability many of us Baby Boomers will live to be centenarians.
Into this uncertainty comes TontineTrust, a new Gibraltar based startup. Founder Dean McClelland begs the question, “What if there was a way to cherry pick the best of both low-cost funds and annuities and wrap them up in a package that enables you to both easily manage your income and have complete transparency over your assets and their projected performance?” This translates to no reliance on a third-party, such as an insurance company or asset manager, and their associated fees.
It seems ironic to be talking about something that was around a hundred years before the Declaration of Independence in the same breath as Blockchain, but TontineTrust founder Dean McClelland views it as the perfect pairing: “The tontine [pronounced tawn-teen], in its heyday, was one of the most successful financial products available. At one point the United States had more than 7.5% of its total national wealth invested in tontines.
“Their weakness, however, was their susceptibility to fraud and manipulation. Nowadays, thanks to the possibilities afforded by smart contracts, advanced biometric identification processes and distributed ledger technology known as the Blockchain, we believe the tontine can re-define itself as the perfect solution for a population that is living increasingly longer in financially uncertain times.”
That all sounds great, but what was it about tontines that made them so successful in the past and now merits digging them out of retirement? Interestingly, over the last few years there have been increasing rumblings and publications from academics and actuaries about the benefits of Tontines, so it seems TontineTrust is not alone in appreciation of their qualities or its mission to see them make their return.
In fact, pension-like tontines exhibit many of the characteristics of annuities. The primary difference, however, is that annuity income is guaranteed by an insurance company, which charges for this. In a tontine, the investors act like their own insurance company, sharing the risk among themselves, saving thousands in annual costs, and allowing the capital to be invested in a sensible spread of investments which have a much better chance of beating inflation.
Over the years, as members of the tontine die off, their share is distributed among the other members in the form of mortality credits. This means that the longer a member lives, the more monthly income they will receive. Talk about a hedge against inflation!
I, for one, am looking forward to seeing what sort of rock-solid product this Gibraltar company will be bringing to our shores next year. I will be watching closely to see if Tontines fulfill their potential to help me and my generation “Live Better, Longer”.