The Importance of Bequest Motives: Evidence from Long-term Care Insurance and the Pattern of Saving∗

Many households spend their wealth slowly during retirement, holding much of their wealth into old age. Determining why they do so is made difficult by a fundamental identification problem: retirees’ saving decisions reflect the combined strength of precautionary and bequest motives. Given the substantial medical spending and mortality risks that retirees face, savings are spent primarily on precautionary needs in some states and on bequests in others. In this paper, I use people’s decisions about whether to buy long-term care insurance and the pattern of saving across the wealth distribution to separately identify precautionary and bequest motives. Estimations based on the Method of Simulated Moments identify modest precautionary motives and widespread, important bequest motives. The estimates imply that among 65–69-year-old single retirees in the U.S., bequest motives increase ∗I thank Gadi Barlevy, Marco Bassetto, Gary Becker, Jeffrey Brown, Mariacristina De Nardi, Amy Finkelstein, Eric French, Lars Hansen, Erik Hurst, Ralph Koijen, David Laibson, Robin Lumsdaine, Casey Mulligan, Kevin Murphy, Emily Oster, Derek Neal, Svetlana Pashchenko, Jonathan Skinner, and seminar participants at the Center for Retirement Research at Boston College, the Federal Reserve Bank of Chicago, the NBER Summer Institute, and the University of Chicago for helpful comments. I am grateful to the National Institute on Aging for financial support (training grant 5T32-AG00243 and grant T32-AG000186).