Portfolio choice in retirement: Health risk and the demand for annuities, housing, and risky assets

Yogo, Motohiro

doi:10.1016/j.jmoneco.2016.04.008

Cited by 221 publications

(68 citation statements)

References 34 publications

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“…In this section, we set the parameter values for the benchmark case. In accordance with Pang and Warshawsky (2010) and Yogo (2012) we set β, the time-preference discount factor, equal to 0.96. The risk aversion coefficient γ is assumed equal to 5 for ease of comparison, since this is equivalent to Pang and Warshawsky (2010) and close to the parameter choice of Yogo (2012) and Ameriks et al (2011).…”

Section: Benchmark Parametersmentioning

confidence: 99%

The annuity puzzle remains a puzzle

Peijnenburg

Nijman

Werker

2016

Journal of Economic Dynamics and Control

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We examine incomplete annuity menus and background risk as possible drivers of divergence from full annuitization. Contrary to what is often suggested in the literature, we find that full annuitization remains optimal if saving is possible after retirement. This holds irrespective of whether real or only nominal annuities are available. Whenever liquidity is desired, individuals save sizeable amounts out of their annuity income to smooth consumption shocks. Similarly, adding variable annuities to the menu does not increase welfare significantly, since individuals can save in order to get the desired equity exposure. We calculate bounds on a possible bequest motive and default risk of the annuity provider and find that for realistic parameters full annuitization remains optimal.

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Section: Benchmark Parametersmentioning

confidence: 99%

The annuity puzzle remains a puzzle

Peijnenburg

Nijman

Werker

2016

Journal of Economic Dynamics and Control

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“…Davidoff (2010) argues that since the desired level of housing consumption also declines after a large health shock, housing equity serves as an ideal saving device for out-of-pocket medical expenditures. Yogo (2009) provides a model with health investments and adjustment costs that also predicts that households primarily dissave in the form of housing equity after a large health shock.…”

Section: Housing and Portfolio Choicementioning

confidence: 99%

“…Medical expenses related to a chronic condition last for a long time, which gradually drains household savings. Yogo (2009) finds that individuals primarily reduce housing equity in response to a large decline in self-reported health between two waves of the HRS.…”

Section: Housing and Portfolio Choicementioning

confidence: 99%

Saving Behavior and Portfolio Choice After Retirement

2015

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This paper reviews the literature on saving behavior and portfolio choice after retirement and provides a descriptive analysis of this behavior by Dutch elderly households. Studying saving behavior in the Netherlands is informative because of the very different institutional background compared to the US, for which most of the empirical evidence is. In the Netherlands, the generous pension system and almost complete coverage of the public health-and long-term care insurance system makes precautionary saving less necessary. Using detailed administrative data, we present evidence on the extent to which the financial resources of retirees are affected by shocks such as the decease of a spouse or deteriorating health-similar to recent empirical studies by Poterba et al. ( 2014) for the US. Moreover, we examine the extent to which retirees who do not experience any shocks are able to keep positive wealth at their disposal and sustain their consumption level during retirement. Our results show that the death of the spouse results in a significant reduction of household wealth compared to surviving couples-which is also found in the USwhile health shocks result in higher household savings in old-age due to the almost complete coverage of health care expenditures. Although retirees in the Netherlands face limited uncertainty about health expenditures, our analysis shows that the elderly, on average, keep large amounts of assets even at a very old age. Our findings suggest that (1) the generous pension benefits are protective of household wealth, (2) illiquid housing wealth constrains the decumulation of household wealth, (3) bequests and transfers after the death of the first spouse are important.

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“…Lockwood (2012) considers the low demand for long-term-care insurance as evidence of the relative importance of bequest motives versus precautionary motives. Finally, we abstract from risky asset returns or portfolio allocation decision of retirees with health risks (except for financial versus housing assets), which Yogo (2016) studies. Instead, we focus more on differences in the medical and LTC expense risk between the U.S. and Sweden.…”

Section: Introductionmentioning

confidence: 99%

Medical Expenses and Saving in Retirement: The Case of U.S. and Sweden

Nakajima

Telyukova²

2018

Preprint

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Many U.S. households have significant wealth late in life, contrary to the predictions of a simple life-cycle model. In this paper, we document stark differences between U.S. and Sweden regarding out-of-pocket medical and long-term-care expenses late in life, and use them to investigate their role in discouraging the elderly from dissaving. Using a consumption-saving model in retirement with significant uninsurable expense risk, we find that medical expense risk accounts for a quarter of the U.S.-Sweden difference in retirees' dissaving patterns. Furthermore, medical expense risk affects primarily financial assets, while its impact on housing is limited.JEL classification: D14, E21, J26, J14

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Portfolio choice in retirement: Health risk and the demand for annuities, housing, and risky assets

Cited by 221 publications

References 34 publications

The annuity puzzle remains a puzzle

The annuity puzzle remains a puzzle

Saving Behavior and Portfolio Choice After Retirement

Medical Expenses and Saving in Retirement: The Case of U.S. and Sweden

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