The Role of Annuitized Wealth in Post-retirement Behavior
- American Economic Journal: Macroeconomics (Forthcoming)
This paper develops a tractable model of post-retirement behavior with health status uncertainty and state verification difficulties. The model distinguishes between annuitized and non-annuitized wealth and features means-tested Medicaid assistance with nursing-home care. We show how to solve the potentially complex dynamic problem analytically, making it possible to characterize optimal behavior with phase diagrams. The analysis provides an integrated treatment of portfolio composition and consumption/wealth accumulation choices. We show the model can explain both the "retirement-saving puzzle" and the "annuity puzzle."
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