|Date: Wednesday, October 30, 2019
Location: 1360 East Hall (4:00 PM to 5:00 PM)
Title: Tontines with bequest
Abstract: Tontines offer a great alternative to current pension products. Members invest in a financial market and receive an additional stream of income from passed away peers. But, like annuities, tontines suffer from pensioners' reluctance to fund the additional stream by giving up wealth at death. Promoting tontines, we analyze the effect of a bequest motive on the decision to invest in a tontine.
We formulate an investment problem where a pensioner chooses the percentage of wealth in the tontine, an investment strategy and their consumption rate. The investment problem is formulated such that the optimal strategy maximizes the utility of lifetime consumption and the left behind bequest. We show that, for a risk-averse investor, the optimal fixed percentage in the tontine is around 80% for a wide range of risk aversion and different bequest motives. We present the case of a flexible percentage together with a discussion about its suitability together with how we attempt to solve its issues.
Speaker: Thomas Bernhardt