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

This paper develops a life-cycle model in which a household faces stochastic health depreciation and chooses consumption, health expenditure, and the allocation of its wealth between bonds, stocks, and housing. The model is calibrated to explain the cross-sectional variation and the joint dynamics of health expenditure, health, and wealth for females, aged 65 or older, in the Health and Retirement Study. The calibrated model implies that the welfare gain from relaxing borrowing constraints on home equity is 5 percent of wealth at age 65. Similarly, the welfare gain from private annuitization is 16 percent of wealth at age 65.