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

Author

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  • Motohiro Yogo

Abstract

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.

Suggested Citation

  • Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing and Risky Assets," Working Papers, Center for Retirement Research at Boston College wp2009-3, Center for Retirement Research, revised Jan 2009.
    • Handle: RePEc:crr:crrwps:wp2009-3
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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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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • I10 - Health, Education, and Welfare - - Health - - - General
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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