This paper analyzes a household's optimal demand for a reverse mortgage. We study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. We find that the demand for reverse mortgages is particularly pronounced for cash-poor, house-rich retirees, and households with a strong bequest motive and low pension income. We analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suffers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. If there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Furthermore, the probability to take out a reverse mortgage is hardly affected unless her financial wealth is small.

This paper studies finite-horizon consumption-portfolio decisions with recursive utility. We show that the parameter seemingly representing the individual’s bequest preference in traditional recursive utility formulations is quantitatively and qualitatively misleading. The parameter value is uninformative about the optimal bequest which, in some cases, is even inversely related to the magnitude of the apparent bequest weight. We argue that the ratio between optimal bequest and the optimal consumption rate just before the terminal date is a much better representation of the strength of the bequest motive. Numerical examples illustrate the pitfalls using the traditional specification and clarifies how the bequest preference affects optimal decisions and the life-cycle patterns of consumption and wealth assuming constant investment opportunities or stochastic interest rates. We show that the typical utility representation for a unit elasticity of intertemporal substitution actually assumes a strong bequest preference.

In a calibrated consumption-portfolio model with stock, housing, and labor income predictability, we evaluate the welfare effects of predictability on life-cycle consumption-portfolio choice. We compare skilled investors who are able to take advantage of all sources of predictability with unskilled investors ignoring predictability. For an unskilled investor the certainty equivalent of wealth is 0.3–6.8% lower than for a skilled investor, depending on the market entry date. We also determine the effect of luck to enter the market at a favorable time. Across market entry dates, skilled but unlucky investors can lose up to 15.4% compared to unskilled but lucky investors.