Finance Seminar Series
Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets
Abstract
This paper develops a consumption and portfolio-choice model of a retiree who allocates wealth among four asset classes: a riskless bond, a risky asset, a real annuity, and housing. Health expenditure is endogenized as investment in response to stochastic depreciation of health. The model is calibrated to explain the joint dynamics of health, health expenditure, and asset allocation of retirees in the Health and Retirement Study, aged 65 and older. The calibrated model is used to assess the welfare gains of an annuity market. The welfare gain is only about ten percent of wealth at age 65, even for the healthiest retirees.
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