Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets
Federal Reserve Bank of Minneapolis
April 16, 2014
AFA 2009 San Francisco Meetings Paper
Boston College Center for Retirement Research Working Paper No. 2009-3
This paper develops a life-cycle model in which a retiree faces stochastic health depreciation and chooses consumption, health expenditure, and the allocation of wealth between bonds, stocks, and housing. The model explains key facts about asset allocation and health expenditure for single retirees, aged 65 or older, in the Health and Retirement Study. The portfolio share in stocks is low overall and is positively related to health, especially for younger retirees. The portfolio share in housing is negatively related to health for younger retirees and falls rapidly in age. The portfolio share in bonds is positively related to health for younger retirees and rises rapidly in age. Finally, out-of-pocket health expenditure as a share of income is negatively related to health and rises rapidly in age.
Number of Pages in PDF File: 37
Keywords: Aging, Asset allocation, Life-cycle model, Medical expenditure, Saving
JEL Classification: D91, G11, I12
Date posted: March 6, 2008 ; Last revised: April 18, 2014
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