Household Portfolio Choice with Competing Savings Goals

Summary

This study examines how a household should invest while addressing a precautionary need with a random arrival time and an accumulation target due on a fixed date. The precautionary claim must be paid in full when it arrives if the household can afford it; the household may decline the accumulation goal at its deadline. This setup captures the tension between maintaining accessible funds and investing for growth.

The authors characterize the problem through a Hamilton–Jacobi–Bellman equation and derive a rule for whether to fund the fixed-deadline goal. The household accepts that goal when its direct benefit outweighs the reduction in value from leaving fewer resources for precautionary needs. Their calibrated model suggests flexibility and the ability to use wealth across goals matter most at intermediate wealth. The conclusions depend on the model and its calibration; the document does not provide details of the parameter choices or a comparison with observed household behavior.

Key ideas

• A random-arrival precautionary goal competes with a fixed-deadline accumulation goal for household wealth.
• The precautionary goal must be paid in full when it arrives if it is affordable.
• The household funds the accumulation goal when its benefit offsets the loss in precautionary value.
• The model finds flexibility and shared use of funds most valuable at intermediate wealth.
• Committing to a goal in advance or separating goals into dedicated accounts can reduce flexibility or fungibility.

Tags

# Portfolio Choice with Competing Precautionary and Accumulation Goals


# Portfolio Choice with Competing Precautionary and Accumulation Goals









We study optimal portfolio choice for a household managing two goals at once. A random-deadline precautionary goal, such as a medical emergency, must be paid in full whenever it arrives and is affordable; a fixed-deadline accumulation goal, such as a target retirement lifestyle, may be declined at its deadline. We show that precautionary saving crowds out growth-oriented investment, and deadline pressure is amplified by the competing precautionary claim. We characterize the value function as the unique viscosity solution of an HJB equation, and derive the household's optimal terminal funding rule. The household funds the fixed-deadline goal exactly when the direct benefit at least offsets the resulting drop in the value of keeping the precautionary goal funded. We calibrate the model and find that both flexibility and fungibility are most valuable at intermediate wealth. Committing in advance to fund a goal sacrifices flexibility, while managing each goal in its own account sacrifices fungibility.

Shown in full with attribution under the source's licence. Licence: abstract CC0

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