PT  - JOURNAL ARTICLE
AU  - Sudipto Banerjee
TI  - Can the Risk of Medical Expenditure Explain<br/>the Wealth Trajectories of Elderly Singles?
AID  - 10.3905/jor.2013.1.1.067
DP  - 2013 Jun 30
TA  - The Journal of Retirement
PG  - 67--80
VI  - 1
IP  - 1
4099  - https://pm-research.com/content/1/1/67.short
4100  - https://pm-research.com/content/1/1/67.full
AB  - In this article, I analyze the role of precautionary savings as a determinant of the wealth holdings of elderly singles. The novel aspect of the analysis is that the distribution of medical expenditure is allowed to be individual-specific, and the variance of medical expenditure is estimated for each individual using repeated observations on medical expenditure. To address the measurement error problem in medical expenditure, I use an instrumental variable estimator. I construct a simple life-cycle model and show that the coefficient of relative risk aversion can be identified from a log-linearized Euler equation for wealth, using the variation in the risk of medical expenditure. The results imply that precautionary savings can account for up to 56% of the wealth holdings of elderly singles. This means lowering the risk exposure of medical expenses at older ages could significantly alter the retirement asset draw-down rates and strategies.TOPICS: Wealth management, retirement, risk management