Why Do the Elderly Save? The Role of Medical Expenses

Abstract

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Saving Behavior and Portfolio Choice After Retirement

“…De Nardi et al (2010) neither find evidence in favor of a bequest motive nor health state dependent utility. The estimated coefficient for relative risk aversion is considerably larger than the one from the model of Hurd (1989).…”

“…In particular, richer households and households with a higher level of education tend to save more (see also Hubbard et al 1995;Dynan et al 2004;De Nardi et al 2010). The life-cycle model can be extended in several directions to account for these observations and to provide a more realistic description of the saving behavior of the elderly.…”

“…Subsequent studies by Palumbo (1999) andDe Nardi et al (2010) examine the importance of out-of-pocket health expenditures for precautionary saving by incorporating the estimated health expenditure risk in a life-cycle consumption model. Their models are based on the retirement phase of the framework of Kotlikoff (1989) and Hubbard et al (1995).…”

“…De Nardi et al (2010) extend the model by allowing for differences in saving behavior between the income-poor and the income-rich, and by accounting for wealth differences between cohorts and differential mortality. They accomplish this by simulating the life-cycle model for different cohorts (with different levels of initial wealth) and by matching the wealth-age profile for different permanent income quantiles and cohorts.…”

Accounting for non-annuitization

“…The sum of persistent and transitory components is normalized to one. 8 The variance of the log medical expenses σ 2 z is equal to 1.78. For the discount factor β, preference parameters σ, η, and ϕ, and the minimum consumption floor c min I use structural estimates from the DFJ study.…”