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Old 09-30-2015, 12:42 PM   #21
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There's no particular reason it has to structured so that the pot goes to one last survivor. Just structure it so that the X% of the end-of-year balance every year (X increases in a fairly aggressive way each year as the cohort ages) is divided among all the surviving members. The thing could be set up in many different ways to distribute any remainder when the last member dies--there shouldn't be much money left, anyway if we choose the distribution rate appropriately. Heck, the thing could even be set up to distribute the entire pot to all survivors when the cohort reaches age 75, everybody gets a lump sum. They'd still do pretty well: Imagine that the tontine is sold to 55 year olds and liquidated when the cohort reaches age 75. About 1/3 of the people alive at age 55 will be dead by age 75, so the survivors would receive a check approx 1/3rd larger than they would have achieved through their own investments (on average). Not bad.


There's some disagreement about that among sources I've seen. According to this paper (see pg 509), only SC and LA specifically prohibit tontines. And if we structure this product so that it benefits a large number of participants and accomplishes a legitimate goal rather than being a morbid winner-take-all death lottery, maybe the legal prohibitions would be avoided.
The point is to provide a product with advantages over existing deferred annuities, then people could decide if they want one, both, or neither.
yes... I quoted that paper earlier including that some cases sided that tontines were illegal without siting actual laws. But in reading that reference you should note that the original goals were to fund other things like governments or projects more than return money to the subscribers.
As noted above, I still think the closest you'd get is a joint annuity.... and if they could put many many people on it. In this case the actuarial age for the last to die would increase and thus the payout would decrease (per year). Think of what happens with a pension when taking it individually or as a couple with 100% survivor benefit. Now you just keep adding people to the annuity (and yes, more contributions). Until many die off, you are much better using a regular annuity. Yes, those living longer would get more later on. They would also have to make up for the lower payments earlier including the effect of time and inflation.
I doubt the insurance industry will make the product that enticing to anyone other than very long lived people as the early payouts will be so much less than annuities or bond ladders. I also expect they will not want to deal with the legal aspects, that is proving it is legal prior to selling it. IMO
But maybe the US could us this as a way to pay out debt (again this was a proposal in the early years from that paper you referenced). Would you buy into that tontine in the present day? Could pay for entitlements and everything else!
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Old 09-30-2015, 07:28 PM   #22
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Interesting article, thanks for posting it. From the link This isn't like an annuity, it's like a pension fund, which has much broader options (compared with annuities) for investing the assets. Properly regulated, this could be an interesting alternative for retirees that have little or no annuity income. A pension fund can take on more portfolio risk compared with each individual member, so it offers a way to increase total return, and then use part of that return to finance the longevity risk.

The high returns, or course, imply that there is no partner survivor option.
The tontine is similar to an annuity as there is obviously a mortality credit.....but if the risk is spread amongst a small number of people there might be a temptation for members to speed the demise of other members. There'd be lots of opportunity for writers of crime fiction to come up with interesting plots set today rather than over a hundred years ago.

https://en.wikipedia.org/wiki/The_Wrong_Box_(novel)

So to Dickens and Mr. Mcawber we can add RLS and the Wrong Box to the list of literary financial references
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Old 09-30-2015, 08:01 PM   #23
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There's no particular reason it has to structured so that the pot goes to one last survivor.
Right.

The OP references Milevsky. Here's his paper explaining a very structured idea:
[1307.2824] Optimal Retirement Tontines for the 21st Century: With Reference to Mortality Derivatives in 1693

Basically, a "sponsor" collects premiums from a group of (presumably) similar mortality risk people. The sponsor invests the money in laddered bonds. The sponsor guarantees a certain schedule of guaranteed total periodic payouts. The survivors at each payout date split that total amount.

The scheduled payouts decrease over time. The guaranteed total payouts conveniently mimic the projected number of survivors at each time in the future, according to some mortality table.

So, if people die exactly according to that table, each individual will experience level payouts over his/her lifetime. If they don't die according to the table, people will get higher or lower amounts.

Needless to say, the sponsor could set this up as a stock fund instead. In this case, the total periodic payouts would be some percent of the outstanding shares. As above, the percent varies over time and is calculated so that if the stocks yield exactly some rate and if people die exactly according to some table, then individual payouts will be level. Now actual payouts vary with two contingencies, investment returns and actual mortality.

I think I had another variation in one of the links you posted.
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Old 09-30-2015, 09:22 PM   #24
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Basically, a "sponsor" collects premiums from a group of (presumably) similar mortality risk people. The sponsor invests the money in laddered bonds. The sponsor guarantees a certain schedule of guaranteed total periodic payouts. The survivors at each payout date split that total amount.

The scheduled payouts decrease over time. The guaranteed total payouts conveniently mimic the projected number of survivors at each time in the future, according to some mortality table.

So, if people die exactly according to that table, each individual will experience level payouts over his/her lifetime. If they don't die according to the table, people will get higher or lower amounts.
Thanks for finding that paper. So, would this provide more benefits to the participants than a conventional annuity? From the paper:

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We have also shown that the utility loss from a properly designed tontine scheme is quite small when compared to an actuarially fair life annuity, which is the work-horse of the pension economics and lifecycle literature. In fact, the utility of from a tontine might actually be higher than the utility generated by a pure life annuity when the insurance
(commission, capital cost, etc.) loading exceeds 10%.
I'd be surprised if insurance companies take less than 10% off the top on their annuity products.
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Old 09-30-2015, 10:16 PM   #25
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Thanks for finding that paper. So, would this provide more benefits to the participants than a conventional annuity? From the paper:

I'd be surprised if insurance companies take less than 10% off the top on their annuity products.
That's probably true, but much of what they take covers marketing, record keeping, customer service, accounting, compliance, capital ...

It seems to me that Milevsky's tontine would require all of those things.

The question is "What is the insurance company's load for the mortality guarantee?" That is the only service or activity that goes away in the tontine case.
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Old 10-01-2015, 08:39 AM   #26
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That's probably true, but much of what they take covers marketing, record keeping, customer service, accounting, compliance, capital ...

It seems to me that Milevsky's tontine would require all of those things.

The question is "What is the insurance company's load for the mortality guarantee?" That is the only service or activity that goes away in the tontine case.
Yes. And is there some "silver lining" of additional safety for subscribers as a result of dropping that guarantee? Depending on how the tontine is structured, the subscribers could have a direct call on the value of the underlying stocks/bonds to make the annual payouts (though the value of these payouts might vary somewhat). Just as we don't count on the financial strength of Vanguard or Fido for the safety of our stock/bond portfolios they hold for us. With an annuity, since the insurance company is making the mortality and market value guarantees, the subscribers are depending entirely on the company's ability to pay.
Also, I do think these tontines would not need to be run by insurance companies at all. Regulators might find that to be more convenient, but it brings a level of costs and a bar to market entry that is inappropriate since the payments would depend only on the value of the underlying assets, not the strength of the company selling subscriptions. It's the elimination of this "pass through" that would result in the most significant cost savings.
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Old 10-01-2015, 10:17 AM   #27
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I'd be surprised if insurance companies take less than 10% off the top on their annuity products.
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Also, I do think these tontines would not need to be run by insurance companies at all. Regulators might find that to be more convenient, but it brings a level of costs and a bar to market entry that is inappropriate since the payments would depend only on the value of the underlying assets, not the strength of the company selling subscriptions. It's the elimination of this "pass through" that would result in the most significant cost savings.
I was thinking the members of the tontine would be the owners of the company, just like Vanguard. No insurance company and no stockholders. Good luck getting THAT past the lobbyists, lol!

But if you think of it like a closed-end mutual fund with very restrictive withdrawal rules, and a beneficiary designation of the fund itself, it would seem like it could be made legal. You could even design the payouts such that there's very little left at the end, so the last guy doesn't "win" that much, which seems to be the sticking point for some people. If you didn't make it an insurance product, you'd need to pay income tax on the gains, but that's probably better than an insurance company skimming a big cut. If Vanguard offered them, I'd be in line to get one.
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Old 10-01-2015, 02:13 PM   #28
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If you didn't make it an insurance product, you'd need to pay income tax on the gains,
Probably true, unless it was funded with Roth IRA money
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If Vanguard offered them, I'd be in line to get one.
Me, too. And within a particular year group there could be a variety of investment mix options. The most appealing to me would be something like their target date funds--equity-heavy until approx 10 years from the date distributions begin, then gradually going to assets with lower volatility. Some people might prefer to join a pool invested only in fixed income investments, etc.
The product would not replace annuities, since many people still want a guaranteed dollar amount for their coming checks. It's more of a way to improve lifetime yield on a pot of investment money by taking advantage of mortality credits (those who no longer need their money and gains pass them to those who are still alive). I don't think it would be any more unsavory or "ghoulish" than buying an annuity.
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Old 10-01-2015, 09:38 PM   #29
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Yes. And is there some "silver lining" of additional safety for subscribers as a result of dropping that guarantee? Depending on how the tontine is structured, the subscribers could have a direct call on the value of the underlying stocks/bonds to make the annual payouts (though the value of these payouts might vary somewhat). Just as we don't count on the financial strength of Vanguard or Fido for the safety of our stock/bond portfolios they hold for us. With an annuity, since the insurance company is making the mortality and market value guarantees, the subscribers are depending entirely on the company's ability to pay.
Also, I do think these tontines would not need to be run by insurance companies at all. Regulators might find that to be more convenient, but it brings a level of costs and a bar to market entry that is inappropriate since the payments would depend only on the value of the underlying assets, not the strength of the company selling subscriptions. It's the elimination of this "pass through" that would result in the most significant cost savings.
Yes, it seems that if you take out the mortality guarantee, you don't need an insurance company.

However, I think this would require a "sponsor", probably a mutual fund company. In theory, any "group of friends" could set this up. But, look at the requirements to form a group. We would need people who all:
- think this is a good retirement income concept
- have similar mortality expectations
- agree on pure life or certain plus life?
- make the same choice regarding single life vs. joint life
- agree on a slope, do they want payouts biased to be increasing, level, or decreasing?
- Or even deferred payouts?
- have similar ideas on the "right" mix of assets
- all want to start now, not at some future date.

Then look at the practical issues of determining the "right" legal structure, assuring safekeeping of assets, getting prompt notification of deaths, doing the accounting, communicating with all the members (and their families) as questions come up, actually withdrawing funds and cutting checks.

This board is probably an ideal place to find a group of people to set one of these up. What's the odds that we could get at least nn people from this board who all answered the same way on the seven choices above?

The ideal sponsor would seem to be Vanguard, as they have a big client base and they know how to, or could learn how to, do the practical stuff above. They would be starting scores or even hundreds of tontines every quarter (I'd guess). It wouldn't be too long before they would have thousands outstanding, each pretty small. And, of course, they have to commit to continue to do this for 40 years into the future - what happens to the tontines if Vanguard decides it doesn't want to fool with them any longer? Somewhere, some regulator is going to want assurance that the sponsor isn't going to disappear with the money, or walk away from long term commitments. Looking at that list, I think the sponsor would want to charge enough to cover all those expenses and commitments.

(Note that Milevsky's concept was that the sponsor would guarantee investment performance - something that's reasonable if the investments are bonds. We've moved away from that.)
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Old 10-01-2015, 09:48 PM   #30
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Too much a romantic spirit. When I hear tontine I picture a fine bottle of brandy that the last surviving pilot of the band of gallant classmates cracks open to drink a toast to their memory. Not getting the sleazy part.
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Old 10-02-2015, 08:43 AM   #31
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What happens when one or more of the subscribers goes into LTC and runs out of funds, sans that tontine? To get medicaid to pay would they demand payment from the asset value of their share of the tontine or the just use their payout? This really goes to how it laws are written around it. Also would a subscriber's assets be protected from creditors and judgments?

If you really want to do it, why not set up a partnership (like an investment club). This would divide the taxes (K-1), proceeds, etc. The question would be how estate taxes (if any) would be taken out when a subscriber dies.

The paper on the new tontine for retirement is more interesting, but subscribers do take most of the risk (market, sequence of returns, mortality, etc).

some have asked about putting in $ from IRA/Roth, could you mix subscribers? If you bought shares like a MF, yes.. but then would accounts effects would that have on taxes and protection from creditors? How would taxes on internal gains be paid? OK, an annuity does not have taxes paid until distributed, but what legal aspect allows that?

Maybe all these and other questions are answered somewhere.

It will be interesting to see how these will be setup if they ever are in the US.
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Old 10-02-2015, 09:15 AM   #32
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But if you think of it like a closed-end mutual fund with very restrictive withdrawal rules, and a beneficiary designation of the fund itself, it would seem like it could be made legal.
Yep. And, while the administrative expense would be somewhat higher than a "regular" CEF (due to the need to verify who is alive and who is dead), that wouldn't seem to cost very much. Annuity companies and SS do it.

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The ideal sponsor would seem to be Vanguard, as they have a big client base and they know how to, or could learn how to, do the practical stuff above. They would be starting scores or even hundreds of tontines every quarter (I'd guess). It wouldn't be too long before they would have thousands outstanding, each pretty small. And, of course, they have to commit to continue to do this for 40 years into the future - what happens to the tontines if Vanguard decides it doesn't want to fool with them any longer? Somewhere, some regulator is going to want assurance that the sponsor isn't going to disappear with the money, or walk away from long term commitments. Looking at that list, I think the sponsor would want to charge enough to cover all those expenses and commitments.
These concerns are valid, but aren't insurmountable, esp if done at large scale. And there would seem to be enough value to allow the sponsor to adequately recoup costs.
Back-of-the-envelope: Let's say we set up a pool of 55 year olds who will begin collecting their longevity insurance checks at age 75. Based on a squinty-eyed look at the SS survival graph for the year 2000, of 93 people alive at age 55, 65 will still be alive at age 75, so 30% of the people have died. Thus, those remaining in the pool when the checks start can expect to receive 30% more in their lifetime than they could have received by just investing their own money in the same way. That's a pretty big delta. The average 75 year old lives another 10 years, so even if Vanguard took 1-2% off the top every year during the distribution period (the only time their costs would be significantly higher than any other account), our pool of survivors would still be well ahead of the game (plus the sponsor would get the ERs from the underlying funds in which the money was invested).

Maybe this type of thing isn't exactly in Vanguard's "no frills" lane, but Schwabb or Fido would be big enough to do it.
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Old 10-25-2015, 09:20 AM   #33
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But maybe the US could us this as a way to pay out debt (again this was a proposal in the early years from that paper you referenced). Would you buy into that tontine in the present day? Could pay for entitlements and everything else!
On a total lark, based on the Washington Post article, I added a basic tontine to the Optimal Retirement Planner retirement calculator (i-orp.com). The early returns are that a tontine could be a useful and interesting retirement financing tool, if it were allowed. The literature indicates that there are financial products out there that skirt on being tontines, by Vanguard and TIAA/CREF, but of course that they don't use that dirty word.
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Old 10-25-2015, 12:24 PM   #34
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Wouldn't any life annuity with mortality credits be a milder version of a tontine? Just a matter of degree it seems to me.
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Old 10-25-2015, 02:59 PM   #35
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Wouldn't any life annuity with mortality credits be a milder version of a tontine? Just a matter of degree it seems to me.
I guess, if a bond is a milder version of a stock. Like an annuity, a bond depends on an entity to pay the interest and to stay in business. Like (most) annuities, a bond has a guaranteed rate (and that guarantee comes at a price). A tontine invested in equities (or other assets) gives the surviving members a direct claim to the equities (or other assets). They also benefit directly from any price appreciation (with an annuity, any appreciation above that needed to pay claims goes to the insurance company).
So, there are some important differences.
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