Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
967545 | Journal of Monetary Economics | 2016 | 18 Pages |
•A life-cycle model of health expenditure and portfolio choice with health risk.•Key inputs are estimated including Medicare and Social Security benefits.•Explains key facts about asset allocation across bonds, stocks, and housing.•Key mechanisms are the horizon effect and decreasing returns to health investment.
In a life-cycle model, a retiree faces stochastic health depreciation and chooses consumption, health expenditure, and the allocation of wealth between bonds, stocks, and housing. The model explains key facts about asset allocation and health expenditure across health status and age. The portfolio share in stocks is low overall and is positively related to health, especially for younger retirees. The portfolio share in housing is negatively related to health for younger retirees and falls significantly in age. Finally, out-of-pocket health expenditure as a share of income is negatively related to health and rises in age.