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

9 Pages Posted: 9 Apr 2009 Last revised: 12 May 2009

See all articles by Julio J. Rotemberg

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased); National Bureau of Economic Research (NBER) (deceased)

Date Written: April 8, 2009

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.

JEL Classification: D14

Suggested Citation

Rotemberg, Julio J., Can a Continuously-Liquidating Tontine (or Mutual Inheritance Fund) Succeed Where Immediate Annuities Have Floundered? (April 8, 2009). Harvard Business School BGIE Unit Working Paper No. 09-121; Harvard Business School Finance Working Paper No. 09-121. Available at SSRN: https://ssrn.com/abstract=1375067 or http://dx.doi.org/10.2139/ssrn.1375067

Julio J. Rotemberg (Contact Author)

Harvard University, Business, Government and the International Economy Unit (deceased) ( email )

Cambridge, MA
United States
617-495-1015 (Phone)
617-496-5994 (Fax)

National Bureau of Economic Research (NBER) (deceased)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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