How Households Adjust their Consumption and Investment Plans under Longevity Risk: An Experimental Approach-based Study in Taiwan

Joseph J Tien and Jerry C Y Miao
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Joseph J Tien: Department of Insurance, Tamkang University, Ying-Chuan Rd., Tamsui, Taipei County 251, Taiwan. E-mails: jilltien@mail.tku.edu.tw; cymiao@mail.tku.edu.tw
Jerry C Y Miao: Department of Insurance, Tamkang University, Ying-Chuan Rd., Tamsui, Taipei County 251, Taiwan. E-mails: jilltien@mail.tku.edu.tw; cymiao@mail.tku.edu.tw

The Geneva Papers on Risk and Insurance - Issues and Practice, 2013, vol. 38, issue 4, 803-823

Abstract: Longevity risk may be defined as the risk of outliving one’s accumulated wealth. Although many theoretical studies have suggested that individuals will increase their precautionary saving in order to mitigate longevity risk, only a few of such studies have used empirical data to test people’s decision-making behaviour in response to longevity risk. The main purpose of this paper is to investigate how households adjust their consumption and investment plans in response to longevity risk. We find that households reduce their consumption over their entire lifespan and increase the proportion of their risky assets before retirement when they face longevity risk. Furthermore, we also discover that households with females, more children, higher health expenditure and greater risk aversion change their risky assets to a lesser extent in their whole life period in the face of longevity risk, compared with other households.

Date: 2013
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