Life cycle behavior under uncertainty: Essays on savings, mortgages and health

Households must take into account various sources of uncertainty when making financial decisions. In the aftermath of the financial crisis of 2007-2008 some of these uncertainties have increased and, arguably, households may have become more aware of the uncertainties they encounter. The purpose of this thesis is to examine to what extent different sources of uncertainty influence household financial decision making, in particular regarding saving, portfolio choice and the choice of financial products such as mortgages.We show that uncertainty related to the outcome of future policies (i.e. limiting the mortgage interest deduction), induce households to save more than optimal to absorb possible financial setbacks. We further demonstrate that financially less sophisticated households, who do not fully understand the complex nature of mortgage loans, tendto choose less risky mortgages, unless they consult a mortgage broker.Using detailed tax records, we provide evidence that elderly households are on average wealthy, but do not dissave. This contrasts with the prediction of the life-cycle theory of saving and cannot be explained by uncertainty regarding income or out-of-pocket medical expenses. Health plays an important role in explaining differences in wealth between households.Using self-reported health combined with objective health measures from medical records, we show that health is more persistent and deteriorates at a faster rate in old age than can be inferred from subjective health measures alone. We further show that mental ill-health combined with an unhealthy lifestyle (smoking and being overweight) is a major contributor to long-term sickness among self-employed (with income insurance).

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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