Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets

Abstract:     
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 is calibrated to explain the cross-sectional variation and the joint dynamics of health expenditure, health, and wealth for single retired respondents in the Health and Retirement Study. The welfare gain from relaxing borrowing constraints on home equity is 2 percent (3 percent) of wealth for females (males) at age 65. Similarly, the welfare gain from private annuitization is 20 percent (28 percent) of wealth for females (males) at age 65.

Number of Pages in PDF File: 57

Keywords: Aging, Asset allocation, Health care, Life-cycle model, Medical expenditure, Saving

JEL Classification: D91, G11, I12, J26

working papers series