Asset Allocation of Two-Person Households under Different Longevity Expectations

This study examines asset allocations of near-elderly couples when spouses have different longevity expectations. Since the risk-adjusted return on equities increases with investment horizon, a spouse who expects longer retirement period has an incentive to hold riskier portfolio. Using data from the Health and Retirement Study, we show that portfolio riskiness increases with the subjective survival probability of the decision-making spouse. As predicted by the bargaining model, portfolio outcomes are uncorrelated with the horizon of the spouse who has less bargaining power. Results also show that the extent expected horizon is incorporated into asset allocation depends on the decider's gender. The share of equities depends on the husband's expected horizon when he leads decision making but not on the wife's horizon when she has more power. These findings contradict the prediction that wife-led households may hold more equities than do husband-led households because of their longer lifespan.