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Catastrophic Health Risk and Retirement Portfolio Choice

Author

Listed:
  • Bandoni Emil

    (Central Bank of Ireland and University College Dublin)

  • Fugazza Carolina

    (University of Turin and CeRP-CCA)

Abstract

A well-documented pattern in US household portfolio data is that the conditional risky share remains broadly stable throughout retirement. We ask whether rare but catastrophic health-expenditure shocks in retirement are sufficient to account for this pattern. We develop a parsimonious life-cycle portfolio-choice model in which rare health disasters, calibrated from Health and Retirement Study (HRS) evidence on severe long-term-care episodes and out-of-pocket medical spending, can absorb a large share of current retirement income and weaken the safe-asset role of pension income. Under this data-driven calibration, the model reproduces the nearly flat risky-share profile observed in the Survey of Consumer Finances and generates a negative health gradient consistent with HRS panel evidence, without bequest motives, housing, annuity choice, endogenous health investment, or recursive preferences.

Suggested Citation

  • Bandoni Emil & Fugazza Carolina, 2026. "Catastrophic Health Risk and Retirement Portfolio Choice," Working papers 109, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    • Handle: RePEc:tur:wpapnw:109
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    File URL: https://www.bemservizi.unito.it/repec/tur/wpapnw/m109.pdf
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    Keywords

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    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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