Health Risk and Portfolio Choice

Abstract

This article investigates the role of self-perceived risky health in explaining continued reductions in financial risk taking after retirement. If future adverse health shocks threaten to increase the marginal utility of consumption, either by absorbing wealth or by changing the utility function, then health risk should prompt individuals to lower their exposure to financial risk. I examine individual-level data from the Study of Assets and Health Dynamics Among the Oldest Old (AHEAD), which reveal that risky health prompts safer investment. Elderly singles respond the most to health risk, consistent with a negative cross partial deriving from health shocks that impede home production. Spouses and planned bequests provide some degree of hedging. Risky health may explain 20%% of the age-related decline in financial risk taking after retirement.