Health Status and Portfolio Choices for Elder People

Shishu Zhang
(H-E-B School of Business, University of the Incarnate Word, San Antonio, Texas 78209, USA)

Abstract: As baby boomers enter the age of retirement, the portfolio choice of the elder people began to draw more and more attention. Although the empirical evidence suggests that elder people tend to hold less risky assets, there is a lack of theoretical research to explain through which channel this happens. The paper sets up a theoretical model that includes the health condition into the utility function and the health expenditure in the constraint to analyze the elder people’s portfolio choice in a rigorous way. The paper analytically solved the model and obtained a numerical solution to analyze the change of parameters of the model on the effect of risk aversion and expected health. In addition, the paper proves the robustness of the analytical solution by solving other two models with different form of utility functions. The numerical solution proves that the elders’ maximum consumption/investment and their health status are positively related.

Key words: health status; portfolio choices; elder people; dynamic programming

JEL codes: G11, I10, G00