Long Term Care Utility and Late in Life Saving

Abstract: What are the essential forces that determine retiree saving patterns? Recent research suggests that bequest motives and precautionary savings motives contribute significantly to the lack of wealth decumulation over the lifecycle. The degree to which these forces can explain late-in-life behavior depends crucially on retiree preferences, which can be challenging to properly identify. In this paper, we build an incomplete markets model of heterogeneous retirees, who save precautionarily when faced with health risks, the potential need for long term care, and an uncertain life span and who value consuming, leaving a bequest, and receiving long term care if they need it. Expenditures on long term care can be valued differently than typical consumption, depending on estimates of a health-state dependent utility function, and retirees can choose the amount to spend on LTC on the intensive margin. Additionally, we develop Strategic Survey Questions (SSQs) that identify preference parameters using a novel application of stated-preference methodology. The model is estimated using data from our newly created Vanguard Research Initiative Panel, using moments from the wealth distribution alone, SSQs alone, and both wealth and SSQs. We analyze how these preferences and risks contribute to late in life savings behavior.

(Coauthored work with John Ameriks, Joseph Briggs, Andrew Caplin, and Matthew Shapiro.)

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