Wealth accumulation over the life cycle and precautionary savings

Abstract

This article constructs and simulates a life cycle model of wealth accumulation and estimates the parame-ters of the utility function (the rate of time preference and the coefficient of risk aversion) by matching the simulated median wealth profiles with those observed in the Panel Study of Income Dynamics and in the Survey of Consumer Finances. The estimates imply a low degree of patience and a high degree of risk aversion. The results are used to study the importance of precautionary savings in explaining wealth accu-mulation. They imply that wealth accumulation is driven mostly by precautionary motives at the beginning of the life cycle, whereas savings for retirement purposes become significant only closer to retirement. KEY WORDS: Precautionary savings; Simulated method of moments. 1