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Optimal retirement income tontines

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  • Milevsky, Moshe A.
  • Salisbury, Thomas S.

Abstract

Tontines were once a popular type of mortality-linked investment pool. They promised enormous rewards to the last survivors at the expense of those died early. While this design appealed to the gambling instinct, it is a suboptimal way to generate retirement income. Indeed, actuarially-fair life annuities making constant payments–where the insurance company is exposed to longevity risk–induce greater lifetime utility. However, tontines do not have to be structured the historical way, i.e. with a constant cash flow shared amongst a shrinking group of survivors. Moreover, insurance companies do not sell actuarially-fair life annuities, in part due to aggregate longevity risk.

Suggested Citation

  • Milevsky, Moshe A. & Salisbury, Thomas S., 2015. "Optimal retirement income tontines," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 91-105.
    • Handle: RePEc:eee:insuma:v:64:y:2015:i:c:p:91-105
    DOI: 10.1016/j.insmatheco.2015.05.002
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