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Accounting for the Heterogeneity in Retirement Wealth

Working Paper 638 | Published September 1, 2005

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Fang Yang Federal Reserve Bank of Dallas
Accounting for the Heterogeneity in Retirement Wealth


This paper studies a quantitative dynamic general equilibrium life-cycle model where parents and their children are linked by bequests, both voluntary and accidental, and by the transmission of earnings ability. This model is able to match very well the empirical observation that households with similar lifetime incomes hold very different amounts of wealth at retirement. Income heterogeneity and borrowing constraints are essential in generating the variation in retirement wealth among low lifetime income households, while the existence of intergenerational links is crucial in explaining the heterogeneity in retirement wealth among high lifetime income households.