4 ms·

This sounds a lot like longevity insurance (a form of deferred annuity) which from what I've read is available now. Normally when you retire (with a decent siz

by derekp7 11y ago

This sounds a lot like longevity insurance (a form of deferred annuity) which from what I've read is available now. Normally when you retire (with a decent size 401k or IRA balance), you have to take a guess at how long you will live, and draw it down at a rate that will last you. The safe bet is to guess you will live to 100, and that the fund will grow at 4-5%, but that may not leave you with enough annual income. The idea of longevity insurance, is you buy something like a $50K policy at age 65, and the insurance company will pay you $70K a year for life after you turn 85. So you buy the policy up front, and adjust your 401k withdrawals so that fund runs out a age 85. Then the annuity takes over after that.

gwern 11y ago
It doesn't directly compare with longevity insurance, but to me it sounds like all the advantages against annuities would carry over: > Annuities are expensive to administer, and so their payouts are rather low. The costs stem in part from paying the insurance company to shoulder all the risk. To guarantee it can make good on all its annuity contracts, the insurer has to set aside a lot of money in reserve — just in case people live longer than expected, or in case the market crashes. A tontine does away with all that overhead, so more money is available to the retirees. By Milevsky's calculations, a tontine might offer a 10 percent to 20 percent premium over an annuity — a bigger pie to be divided among the group. The downside is that retirees would see their payouts fluctuate depending on the various times other people in the tontine group died. Compared to an annuity, a tontine abandons certain payouts for much higher returns...Such a system would be cheaper to operate and would always, by definition, be fully funded. The funny thing is that some retirement systems already carry out a version of that process. As Milevsky documents in his book, there is "tontine thinking" embedded in various national pension schemes, and even in a product offered by TIAA-CREF in the United States. These plans adjust payments according to mortality. They just don't use the word tontine.
- derekp7 11y ago
  Just for reference (and to see if longevity insurance is a good deal), I ran some numbers using the SSA actuary tables (at http://www.ssa.gov/oact/STATS/table4c6.html http://www.ssa.gov/oact/STATS/table4c6.html). I ran a few scenarios as follows, assuming no administrative overhead: 1) If everyone in a given pool puts in $50k at age 65, the surviving members can withdraw $18k per year starting at age 85 -- any more and the fund runs dry. 2) If the fund is invested at an interest rate of 2%, they can withdraw $30k annually starting at 85 without the fund running out. 3) At 5% interest, that number goes to $62k. For comparison, according to a random article on longevity insurance, Met Life quotes a payout of $15k per year (at 85) if $50k is invested at age 65. Also, as another point of reference, if you invest 50k at 65 and get 5% returns, and withdraw 13k staring at 85, you will have enough to last you till age 96. So the longevity quote above really isn't that great of a deal.
RockyMcNuts 11y ago
Deferred annuities are, unfortunately a bit of a minefield for consumers - usually sold with high annual expenses, high commissions, and the insurance company takes the other side of the mortality bet: if people die earlier than expected the insurance company gets a windfall, if they die much later the insurance company takes a loss, and the annuity buyer is potentially exposed to credit risk if the insurance company fails (seems unlikely but a lot can happen over a 50-year accumulation and withdrawal period). In my opinion, this is an example of regulation and taxation allowing gimmicky and expensive products and sometimes downright shenanigans, while blocking a simple, inexpensive solution to a universal problem. What is insurance if not a pool of people coming together to share risks? What better sharing economy product than a crowd-sourced, peer-to-peer, life insurance solution. I blogged a bit more on the subject here - http://blog.streeteye.com/blog/2015/09/tontines-strange-name-great-idea/ http://blog.streeteye.com/blog/2015/09/tontines-strange-name...

by derekp7 11y ago

gwern 11y ago

It doesn't directly compare with longevity insurance, but to me it sounds like all the advantages against annuities would carry over: > Annuities are expensive to administer, and so their payouts are rather low. The costs stem in part from paying the insurance company to shoulder all the risk. To guarantee it can make good on all its annuity contracts, the insurer has to set aside a lot of money in reserve — just in case people live longer than expected, or in case the market crashes. A tontine does away with all that overhead, so more money is available to the retirees. By Milevsky's calculations, a tontine might offer a 10 percent to 20 percent premium over an annuity — a bigger pie to be divided among the group. The downside is that retirees would see their payouts fluctuate depending on the various times other people in the tontine group died. Compared to an annuity, a tontine abandons certain payouts for much higher returns...Such a system would be cheaper to operate and would always, by definition, be fully funded. The funny thing is that some retirement systems already carry out a version of that process. As Milevsky documents in his book, there is "tontine thinking" embedded in various national pension schemes, and even in a product offered by TIAA-CREF in the United States. These plans adjust payments according to mortality. They just don't use the word tontine.

derekp7 11y ago
Just for reference (and to see if longevity insurance is a good deal), I ran some numbers using the SSA actuary tables (at http://www.ssa.gov/oact/STATS/table4c6.html http://www.ssa.gov/oact/STATS/table4c6.html). I ran a few scenarios as follows, assuming no administrative overhead: 1) If everyone in a given pool puts in $50k at age 65, the surviving members can withdraw $18k per year starting at age 85 -- any more and the fund runs dry. 2) If the fund is invested at an interest rate of 2%, they can withdraw $30k annually starting at 85 without the fund running out. 3) At 5% interest, that number goes to $62k. For comparison, according to a random article on longevity insurance, Met Life quotes a payout of $15k per year (at 85) if $50k is invested at age 65. Also, as another point of reference, if you invest 50k at 65 and get 5% returns, and withdraw 13k staring at 85, you will have enough to last you till age 96. So the longevity quote above really isn't that great of a deal.

RockyMcNuts 11y ago

Deferred annuities are, unfortunately a bit of a minefield for consumers - usually sold with high annual expenses, high commissions, and the insurance company takes the other side of the mortality bet: if people die earlier than expected the insurance company gets a windfall, if they die much later the insurance company takes a loss, and the annuity buyer is potentially exposed to credit risk if the insurance company fails (seems unlikely but a lot can happen over a 50-year accumulation and withdrawal period). In my opinion, this is an example of regulation and taxation allowing gimmicky and expensive products and sometimes downright shenanigans, while blocking a simple, inexpensive solution to a universal problem. What is insurance if not a pool of people coming together to share risks? What better sharing economy product than a crowd-sourced, peer-to-peer, life insurance solution. I blogged a bit more on the subject here - http://blog.streeteye.com/blog/2015/09/tontines-strange-name-great-idea/ http://blog.streeteye.com/blog/2015/09/tontines-strange-name...