Wharton Pension Research Council Working Papers

Document Type

Working Paper

Date of this Version



This paper develops a consumption and portfolio-choice model of a retiree who allocates wealth among four assets: a riskless bond, a risky asset, a real annuity, and housing. Unlike previous studies that treat health expenditures as exogenous negative income shocks, this paper builds on the Grossman model to endogenize health expenditures as investments in health. I calibrate the model to explain the joint evolution of health status and the composition of wealth for retirees, aged 65 to 96, in the Health and Retirement Study. I use the calibrated model to assess the welfare gains of an actuarially fair annuity market. The welfare gain is less than 1% of wealth for the median-health retiree at age 65, and the welfare gain is about 10% of wealth for the healthiest.

Working Paper Number


Copyright/Permission Statement

Opinions and errors are solely those of the author and not of the institutions with whom the author is affiliated. © 2009 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.


For comments and discussions, I thank Andrew Abel, Franklin Allen, John Ameriks, Jeffrey Brown, David Chapman, Raquel Fonseca, Eric French, John Jones, Ahmed Khwaja, Hanno Lustig, and Olivia Mitchell. I also thank seminar participants at the Federal Reserve Bank of New York, Nomura Securities, Northwestern University, Princeton University, University of Illinois at Urbana-Champaign, University of Pennsylvania, University of Tokyo, Yale University, the 2008 Michigan Retirement Research Center Research Workshop, the 2008 Texas Finance Festival, the 2008 Summer Real Estate Symposium, the 2008 Annual Meeting of the Society for Economic Dynamics, the 2008 NBER Summer Institute Capital Markets and the Economy Workshop, and the 2008 Joint Statistical Meetings. I acknowledge financial support from the University of Pennsylvania through grants from the National Institutes of Health-National Institute on Aging (grant number P30-AG12836), the Boettner Center for Pensions and Retirement Security, the National Institutes of Health-National Institute of Child Health and Human Development Population Research Infrastructure Program (grant number R24-HD044964), and the Rodney L. White Center for Financial Research. I also acknowledge financial support from the Center for Retirement Research at Boston College through the Steven H. Sandell Grant for Junior Scholars in Retirement Research.

Included in

Economics Commons



Date Posted: 23 August 2019