Uncertain Health and Survival: Effects on End-of-Life Consumption

This article analyzes the impact of health and survival uncertainty on the saving and consumption decisions of retirees. A dynamic programming approach is used to model the household's planning problem. The utility parameters are estimated using panel data. We find that a fall into poor health raises the marginal utility from consumption. Simulations are used to indicate the effects of falling into poor health and loss of spouse. They reveal a large transfer from the healthy to the sick partner and a strong dependence of saving on the survivor benefits, suggesting that concern about the surviving spouse is an important motive for saving.