The Interplay of Wealth, Retirement Decisions, Policy and Economic Shocks

TitleThe Interplay of Wealth, Retirement Decisions, Policy and Economic Shocks
Publication TypeReport
Year of Publication2012
AuthorsScholz, JKarl, Seshadri, A
InstitutionAnn Arbor, The University of Michigan
KeywordsConsumption and Savings, Demographics, Event History/Life Cycle, Health Conditions and Status, Healthcare, Net Worth and Assets, Retirement Planning and Satisfaction, Social Security

We develop a model of health investments and consumption over the life cycle where health affects longevity, provides flow utility, and retirement is endogenous. We develop a rich, numerical life-cycle model to study the complex interrelationship between health and wealth and the age of retirement. The decision to retire depends on a number of factors including earnings and health shocks, demographic characteristics, preferences, pensions, and social security. We incorporate these features in a computational model of optimal wealth and retirement decisions, solving the model household-by-household using data from the HRS. We use the model to study how workers would respond to an increase in the early eligibility age of retirement (EEA), and to what extent will the bad economy alter retirement plans. We find that increasing the EEA results in sizeable responses to the age of retirement but does not affect health outcomes very much. A 20 percent reduction in wealth induces households to delay retirement by one year, on average, with poor households being relatively unaffected.

Endnote Keywords

life Cycle/health investments/Consumption/retirement planning/health Shocks/wealth/social Security/Demographic aspects

Endnote ID


Citation Key5945