Ambiguity and learning about the equity premium can simultaneously explain the low fraction of financial wealth allocated to stocks over the life cycle and the stock market participation puzzle. Individuals are ambiguous about the size of the equity premium and are averse to this ambiguity, resulting in lower stock allocations over the life cycle, consistent with the data. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity leads to underdiversification, home bias, lower Sharpe ratios, and higher savings. Similar results cannot be obtained by assuming higher risk aversion.

Means-tested retirement benefits create incentives to cash out pension wealth. Individuals trade off the advantages from annuitization, receiving longevity risk insurance, to the disadvantages, giving up ‘free’ wealth in the form of means-tested supplemental income. We quantify the impact of means-tested benefits with a calibrated life-cycle model, demonstrating that they substantially reduce the desire to annuitize especially for low and intermediate levels of pension wealth. Using an administrative dataset on pension choices, we show that the model's predicted fraction of retirees choosing the annuity is able to match the annuitization pattern of occupational pension wealth observed in Switzerland. On the base of our model, we also assess alternative policies such as mandatory annutization and tougher asset tests.