Wharton Pension Research Council Working Papers

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Working Paper

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This paper derives optimal equity-bond-annuity asset portfolios for households in the retirement phase who, with or without a bequest motive, face stochastic capital market returns, have differential exposures to mortality risk and uncertain uninsured health expenses, and have differential Social Security and defined benefit pension coverage. The numerical results show that the presence of health spending risk drives households to shift their portfolios from risky equities to safer assets and works to enhance the demand for annuities due to their increasingwith-age superiority over bonds as a hedge against life-contingent health spending as well as longevity risks. The safe and higher-return annuities in turn provide a greater leverage for equity investment in the remaining asset portfolios. This health-spending-uncertainty-enhanced optimal annuitization result is compatible with the broader theory about liquidity constraints and precautionary savings.

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© 2008 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.


Opinions expressed here are the authors’ own and not necessarily those of institution with which they are affiliated. They thank Eric French, Allen Jacobson, Olivia S. Mitchell, Michael Orszag, Mark Ruloff, and participants at the 13th International Conference on Computing in Economics and Finance for useful comments and Ben Weitzer for research assistance. We are especially grateful to Eric French for his generous sharing of coefficient estimates. A longer version of the paper, including figures for the sensitivity tests, is available from the authors upon request. All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council.

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Date Posted: 09 August 2019