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The Theory of Life-Cycle Saving and Investing

27 Pages Posted: 27 Jul 2007  

Zvi Bodie

Boston University - Department of Finance & Economics

Jonathan Treussard

Research Affiliates

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Date Written: May 2007

Abstract

How much should a family save for retirement and for the kids' college education? How much insurance should they buy? How should they allocate their portfolio across different assets? What should a company choose as the default asset allocation for a mandatory retirement saving plan? We believe that the life-cycle model developed by economists over the last fifty years provides guidance for making such decisions. The theory teaches us to view financial assets as vehicles for transferring resources across different times and outcomes over the life cycle, and that perspective allows households and planners to think about their decisions in a logical and rigorous way. This paper lays out and illustrates the basic analytical framework from the theory in nonmathematical terms, with the aim of providing guidance to financial service providers, consumers, and policymakers.

JEL Classification: D14, D91

Suggested Citation

Bodie, Zvi and Treussard, Jonathan and Willen, Paul, The Theory of Life-Cycle Saving and Investing (May 2007). FRB of Boston Public Policy Discussion Paper No. 07-3. Available at SSRN: https://ssrn.com/abstract=1002388 or http://dx.doi.org/10.2139/ssrn.1002388

Zvi Bodie

Boston University - Department of Finance & Economics ( email )

United States

HOME PAGE: http://www.zvibodie.com

Jonathan Treussard

Research Affiliates ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Paul S. Willen (Contact Author)

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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