Working paper

Dynamic asset allocation when bequests are luxury goods

13 Dec 2012
DOI

http://doi.org/10.4225/50/583f5bc394f8f
Description

Luxury bequests impart systematic e ects of age to an investor's optimal allocation: the expected percentage allocation to equities rises throughout retirement. When bequests are luxuries the marginal utility of bequests declines more slowly than the marginal utility of consumption. This is essentially lower risk aversion. As a retiree approaches death, her expected remaining lifetime utility is increasingly composed of bequest utility, and thus generates progressively lower risk aversion. 
A retiree responds by increasingly favoring the higher-return risky asset. Compared to standard
preferences, luxury bequests elevate a retiree's average exposure to risky assets, but the di erence
is small in early retirement.

Publication Details
Identifiers: 
DOI: 
10.4225/50/583f5bc394f8f
Published year only: 
2012
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