The Effect of Marital Status and Children on Savings and Portfolio Choice

This paper investigates the impact of demographic shocks on optimal decisions about saving, life insurance, and, most centrally, asset allocation. We analyze these choices within the framework of a life-cycle model that features exogenous changes in family composition, heterogeneity in lifetime income, and uninsurable fluctuations in earnings and medical costs. Our analysis indicates that marital-status transitions and children can have important effects on optimal household decisions. Widowhood induces sharp reductions in the portfolio shares in stock, and the impact is largest for women and individuals with children. Divorce causes men and women to reallocate their portfolios in different directions; men choose much riskier allocations, while women opt for safer ones. Children play a fundamental role in the optimal portfolio decisions. Men with children, for example, increase their shares in response to divorce by less than half as much as men without children. Comparing our simulation results with panel-data evidence on stockholding from the PSID and the HRS, we conclude that changes in marital status and children matter empirically as well, but not always in the ways that the model predicts. JEL classification: G11; G22; D91; E21; I10; J12