Portfolio Allocation over Life-Cycle with Multiple Late-in-Life Saving Motives

Older households face health-related risks, including risk of being in need of long-term care and mortality risk. How these risks affect financial portfolio choice of households depends on household preferences for long-term care and bequest. Using linked survey-administrative data on clients of a mutual fund company, this paper finds that the desire to have enough resources for long-term care and bequests are overall strong but also heterogeneous across households. The estimated relationship between actual stock share of households and the strength of these preferences is qualitatively similar but quantitatively much weaker compared to the predictions from the life-cycle model with the estimated preference heterogeneity. Based on the predictions from the model, this paper discusses what financial instruments would better meet the needs of households.