When I retire I’d like to be able to invest in a fund holding a low-cost index of the world’s stocks that addresses longevity risk. The idea is that it would be like a low-cost annuity based on stock returns rather than bond returns.
The easiest way to describe this idea is first as a simple tontine structure. Imagine a large number of 65-year old women each placing $100,000 into a fund and the money gets invested in a low-cost index of the world’s stocks. Each month the fund sells some fraction of the shares and divides the money among the surviving women.
The dollar value of shares the fund sells would be chosen based on expected stock market returns and mortality expectations. The payouts would be calculated so that if these expectations turn out exactly right, then the monthly payments would rise exactly with inflation. However, the actual monthly payments would be based on actual stock returns and the actual number of surviving women. No money would go to the estates of women who die; this is the trade-off to get higher payments while still alive.
In a real fund of this type, we’d actually open the fund up to different deposit amounts, different ages, men, and couples. We could even introduce the option of payments to an estate after an early death (in exchange for lower payments while alive). We’d need to have actuarial rules to choose fair payout levels. We’d also need rules for how to adjust payment levels if longevity statistics change over time.
Another possible approach to this type of product is to have an insurance company take on the longevity risk rather than having a tontine structure based on actual mortality. The insurance company would essentially promise to deliver a certain number of shares (or more likely the cash value of the shares) each month. The payment levels would be determined by stock market returns and expected mortality statistics (actual mortality numbers would not affect payments).
All these details can be worked out by people skilled at actuarial math. The main thing I want is to get investment returns based on stock investments along with the higher payments that come from eliminating longevity risk.
I wouldn’t put all my money in such an investment, but I would put in a substantial amount when I retire. I’d then maintain a cash cushion to deal with stock market volatility, and I’d keep some fraction of my portfolio to manage on my own. I might also buy a standard simple annuity to serve as a bond-like version of this type of new investment.