b'CHAPTER 3 | ECONOMIC PREPARATION FOR RETIREMENTWhy Do We Save? Medical Costs However, a 95-year-old in the lowest range of Concerns about retirement preparation areMany people recognize that if they live a longpermanent income pays only $2,900 in medical rooted in Americans low saving rate. A commontime, they may face potentially large medicalexpenses, and the top income individual pays explanation is that people do not earn enoughcosts. The risk of poor health and associated$26,945 per year. Those in the top income bracket to both pay for their current expenses and savemedical expenses appears to be a powerfulappear to be very frugal, even at older ages, and for retirement. Yet even accounting for differentdriving force in precautionary saving. Multiplethe main reason is the desire to be able to pay levels of income, there is a very wide distributionstudies using the rich longitudinal informationfor these potentially large medical costs. Those of household wealth in the original HRS cohorton health conditions, costs and retirement wealthwith low income and wealth are more likely to in 1992 (Venti and Wise 2001). A substantialin the HRS demonstrate that these fears arerely on government programs like Medicaid and proportion of high-income households have lownot unfounded. One line of research, using theMedicare. Interestingly, Levy (2007) finds that wealth, and many low-income households haveAHEAD cohort, studies the impact of longevityabout 23% of the original HRS cohort experience substantial savings. Sociodemographics appear toon saving (De Nardi et al. 2012). HRS containsa period of having no health insurance coverage account for relatively little of the wide dispersionextensive information on net worth and the valuein the six years leading up to age 65, the age of in retirement wealth. Instead, the choice to saveof retirement income sources like Social Security,eligibility for Medicare. Fortunately, only 2% of and how much to save appears to be the strongestpensions and annuities. These are used to cal- this cohort experience an uninsured hospitaliza-predictor of retirement wealth.culate permanent income, a measure of lifetimetion during that period.wealth. For 1993 and 1995, when AHEAD wasAnother study looks at the unfolding impact The choice to save and how mucha separate study focused on an older cohort, theover time of acute health events and chronic to save appears to be the strongestsurvey contains information on OOPM expenseshealth conditions on the wealth of older adults including insurance premiums, drug costs, doctor(Lee and Kim 2008). The development of health predictor of retirement wealth. and dental visits, and any extra costs for hospitalconditions leads to wealth depletion. Despite be-stays and outpatient care.ing eligible for Medicare, some individuals appear Clearly, the decision to save is importantMedical costs rise very rapidly with age, andto self-insure by saving, and for retirement preparation, and understandingthose with the highest income have veryspending little, so that they what motivates people to save for retirementhigh OOPM expenses. OOPM costs risehave enough savings to and to conserve financial resources in retirementfrom $1,875 (in 2016 dollars) perpay for the medical is an important goal. Researchers use the HRSyear for the average 75-year-old tocare they want. to explore a wide range of factors such as the$15,690 at age 95.Similarly, Coile desire to save money in case of poor health andand Milligan associated OOPM costs. Others study personal(2009) show that characteristics like conscientiousness that mayhealth problems influence saving. Another line of research sug- lead to significant gests that financial literacy plays an importantchanges in retire-role in retirement savings. External incentivesMany people recognize that if theyment portfolios such as employer-based pension contributionover time. Ownership matching can also be important in encouraginglive a long time, they may facerates for principal res-retirement savings. potentially large medical costs. idences, vehicles, financial 57'