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This paper develops a consumption and portfolio-choice model of a retiree who allocates wealth among four assets: a riskless bond, a risky asset, a real annuity, and housing. Unlike previous studies that treat health expenditures as exogenous negative income shocks, this paper builds on the Grossman model to endogenize health expenditures as investments in health. The author calibrates the model to explain the joint evolution of health status and the composition of wealth for retirees, aged 65 to 96, in the Health and Retirement Study. The author uses the calibrated model to assess the welfare gains of an actuarially fair annuity market.
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