This paper investigates the impact of demographic shocks on optimal decisions about saving, life insurance, and, most centrally, asset allocation. We analyze these choices within the framework of a life-cycle model that features exogenous changes in family composition, heterogeneity in lifetime income, and uninsurable fluctuations in earnings and medical costs. Our analysis indicates that marital-status transitions and children can have important effects on optimal household decisions. Widowhood induces sharp reductions in the portfolio shares in stock, and the impact is largest for women and individuals with children. Divorce causes men and women to reallocate their portfolios in different directions; men choose much riskier allocations, while women opt for safer ones. Children play a fundamental role in the optimal portfolio decisions. Men with children, for example, increase their shares in response to divorce by less than half as much as men without children. Comparing our simulation results with panel-data evidence on stockholding from the PSID and the HRS, we conclude that changes in marital status and children matter empirically as well, but not always in the ways that the model predicts.

Previous studies find a strong and positive empirical connection between health status and the share of risky assets held in household portfolios. But is this relationship truly causal, in the sense that households respond to changes in health by altering their portfolio allocation, or does it simply reflect unobserved differences across households? We find that the link between health and risky assets depends crucially on the econometric treatment of unobserved heterogeneity. Once we account adequately for unobserved household differences, we find no statistically significant effect of health status on either portfolio allocations or ownership among older households (those with respondents 70 and older) in the Health and Retirement Study. Younger households, in contrast, do seem to adjust their portfolios on both the extensive and intensive margins in response to health shocks.JEL classification: G11; I10

As the baby boomers begin to retire, a great deal remains unknown about the evolution of wealth toward the end of life. In this paper, we develop a new measure of household resources that converts total financial, nonfinancial, and annuitized assets into an expected annual amount of wealth per person. We use this measure, which we call "annualized comprehensive wealth," to investigate spend-down behavior among older households in the Health and Retirement Study. Our analysis indicates that, in (real) dollar terms, the median household's wealth declines more slowly than its remaining life expectancy, so that real annualized wealth actually tends to rise with age over retirement. Comparing the estimated age profiles for annualized wealth with profiles simulated from several different life cycle models, we find that a model that takes into account uncertain longevity, uncertain medical expenses, and (for higher-income retirees) intended bequests lines up best with the HRS data.

This paper investigates the impact of demographic shocks on optimal decisions about saving, life insurance, and, most centrally, asset allocation. We analyze these choices within the framework of a life-cycle model that features exogenous changes in family composition, heterogeneity in lifetime income, and uninsurable fluctuations in earnings and medical costs. Our analysis indicates that marital-status transitions and children can have important effects on optimal household decisions. Widowhood induces sharp reductions in the portfolio shares in stock, and the impact is largest for women and individuals with children. Divorce causes men and women to reallocate their portfolios in different directions; men choose much riskier allocations, while women opt for safer ones. Children play a fundamental role in the optimal portfolio decisions. Men with children, for example, increase their shares in response to divorce by less than half as much as men without children. Comparing our simulation results with panel-data evidence on stockholding from the PSID and the HRS, we conclude that changes in marital status and children matter empirically as well, but not always in the ways that the model predicts.JEL classification: G11; G22; D91; E21; I10; J12 Keywords: Portfolio choice; mortality risk; marital status; precautionary saving; bequests; risk and uncertainty. * Dept. of Economics, Williams College, Williamstown, MA 01267, david.love@williams.edu. I am grateful to Chris Carroll, Michael Palumbo, Maria Perozek, Lucie Schmidt, and two anonymous referees.

This paper solves and simulates a stochastic life-cycle model of an economy with 401(k) plans. We use the model to establish a benchmark for patterns of contributions and participation and show how these patterns depend on such features as employer matching, vesting policies, and the ability to make early withdrawals. Consistent with empirical studies, the model predicts relatively low participation rates among younger workers and shows that these rates tend to rise with more generous matching, lower vesting periods, and improved liquidity.