Abstract:
The literature on asset accumulation by households draws a sharp distinction between
"short-run" precautionary motives to buffer annual consumption from annual labor income shocks, and
"long-run" life cycle considerations under labor income certainty. However, empirical estimates of the
persistence of shocks to annual incomes imply that households are subject to considerable career
uncertainty. We study long-run precautionary motives for life-cycle wealth accumulation and portfolio
choice. We compute optimal portfolios under three sources of uncertainty (stock returns, incomes, and
lifespan), and explore the separate contributions of several key factors for mean and median asset
holdings, including education, risk aversion, household heterogeneity, utility from bequests, time
preference, and variance and serial correlation of income shocks. Numerical solutions for households
in three education groups are compared with data from the most recent and comprehensive source, the
1992 Survey of Consumer Finances.
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