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

  • Motohiro Yogo

This paper develops a consumption and portfolio-choice model of a retiree who allocates wealth among four assets: a riskless bond, a risky asset, a real annuity, and housing. Unlike previous studies that treat health expenditures as exogenous negative income shocks, this paper builds on the Grossman model to endogenize health expenditures as investments in health. I calibrate the model to explain the joint evolution of health status and the composition of wealth for retirees, aged 65 to 96, in the Health and Retirement Study. I use the calibrated model to assess the welfare gains of an actuarially fair annuity market. The welfare gain is less than 1% of wealth for the median-health retiree at age 65, and the welfare gain is about 10% of wealth for the healthiest.

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File URL: http://crr.bc.edu/working-papers/portfolio-choice-in-retirement-health-risk-and-the-demand-for-annuities-housing-and-risky-assets/
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Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2009-3.

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Length: 52 pages
Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:crr:crrwps:wp2009-3
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