Working Paper | HBS Working Paper Series | 2009

Can a Continuously-Liquidating Tontine (or Mutual Inheritance Fund) Succeed where Immediate Annuities Have Floundered?

by Julio J. Rotemberg

Abstract

A new instrument (the Mutual Inheritance Fund or MIF) is proposed whose purpose is to help people carry their savings forward from the moment they retire into their old age. Like annuities, this instrument requires an up-front payment before people receive any benefits while also protecting people from the risk that they will live a long time. The funds that individuals contribute to a MIF are invested in a mutual fund. The proceeds from the fund's underlying assets are reinvested until the contributor dies or he turns an age specified in advance. If a contributor dies before this pre-specified age, his shares are liquidated and the proceeds are distributed to the other contributors to the MIF. Contributors who are alive at the pre-specified age are also paid the value of their accumulated shares. Like tontines, of which MIF is a variant, this instrument has returns that are more tilted towards old age than annuities. Several advantages of this are discussed, including some that may explain why tontines have proven popular with consumers in the past.

Keywords: Age Characteristics; Annuities; Investment Return; Investment Funds; Saving; Retirement;

Citation:

Rotemberg, Julio J. "Can a Continuously-Liquidating Tontine (or Mutual Inheritance Fund) Succeed where Immediate Annuities Have Floundered?" Harvard Business School Working Paper, No. 09-121, April 2009.