Catastrophic Health Risk and Retirement Portfolio Choice

A well-documented pattern in US household portfolio data is that the conditional risky share remains broadly stable throughout retirement. We ask whether rare but catastrophic health-expenditure shocks in retirement are sufficient to account for this pattern. We develop a parsimonious life-cycle portfolio-choice model in which rare health disasters, calibrated from Health and Retirement Study (HRS) evidence on severe long-term-care episodes and out-of-pocket medical spending, can absorb a large share of current retirement income and weaken the safe-asset role of pension income. Under this data-driven calibration, the model reproduces the nearly flat risky-share profile observed in the Survey of Consumer Finances and generates a negative health gradient consistent with HRS panel evidence, without bequest motives, housing, annuity choice, endogenous health investment, or recursive preferences.