Life-Cycle Finance in Theory and in Practice
Boston University School of Management Working Paper No. 2002-02
15 Pages Posted: 13 Jun 2002
Date Written: April 2002
This paper draws upon the modern science of finance to address several important practical issues in personal finance. Chief among these is how much to save for retirement and how to invest those savings. The paper suggests ways that advances in the theory of finance combined with innovations in financial contracting technology might be used to improve social welfare by designing and producing a new generation of user-friendly life-cycle products for consumers. It contrasts the old Markowitz single-period paradigm of efficient diversification with a new Mertonian paradigm that takes account of multi-period hedging, labor supply flexibility, and habit formation.
Keywords: life-cycle finance, personal investing, personal financial planning, Markowitz paradigm, Mertonian paradigm
JEL Classification: D11, D91, E21, G11, J2, J26
Suggested Citation: Suggested Citation