RT Journal Article
SR Electronic
T1 Can the Risk of Medical Expenditure Explain<br/>the Wealth Trajectories of Elderly Singles?
JF The Journal of Retirement
FD Institutional Investor Journals
SP 67
OP 80
DO 10.3905/jor.2013.1.1.067
VO 1
IS 1
A1 Sudipto Banerjee
YR 2013
UL https://pm-research.com/content/1/1/67.abstract
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