Individual Tontine Accounts

Abstract

An individual tontine account (ITA) is an investment product similar to a conventional brokerage account, but with the added feature of mortality pooling through participation in an open-ended fair tontine. The ITA exploits the property that participants in a fair tontine need not be confined to a common investment portfolio or to a common payout method. Instead, participants are allowed to select and trade investments as they wish and to choose from a variety of payout methods, with each participant's results being largely unaffected by the investment and payout choices of others. We envision the ITA as being complementary to an individual retirement account (IRA), allowing retirees to derive extra income from savings without taking on additional investment risk and to obtain lifetime income at a lower cost than with comparable insurance products. The mortality-pooling features of ITAs compare favorably to those of insurance products. The cost per dollar of income is lower. The opportunity for individual choice is increased. Fees are transparent rather than opaque. Accounting is transparent and conveyed simply on account statements. The downside of ITAs is that income from mortality pooling is not guaranteed, and a participant might experience less income than hoped for if other participants live longer than expected. ITAs represent a new arrow in the quiver for addressing global retirement needs and may address the “annuity puzzle” by giving retirees a more transparent, lower-cost alternative to insurance-based products.