Medical Expenses and Saving in Retirement: The Case of the United States and Sweden

Many US households have significant wealth late in life, contrary to the predictions of a simple life-cycle model. By comparison, retirees in Sweden decumulate wealth more quickly while facing smaller out-of-pocket medical expense risks late in life. In this paper, we investigate how well the latter can account for the former using a full life-cycle consumption-saving model. We find that medical expense level and risk account for 32–59 percent of the US-Sweden difference in retirees' speed of wealth decumulation depending on age. We also show that financing and coverage of health insurance affect wealth decumulation patterns in retirement. (JEL D15, G22, G51, I13, J14, J26)