Life-Cycle Finance in Theory and in Practice

Boston University School of Management Working Paper No. 2002-02

15 Pages Posted: 13 Jun 2002  

Zvi Bodie

Boston University - Department of Finance & Economics

Date Written: April 2002

Abstract

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

Bodie, Zvi, Life-Cycle Finance in Theory and in Practice (April 2002). Boston University School of Management Working Paper No. 2002-02. Available at SSRN: https://ssrn.com/abstract=313619 or http://dx.doi.org/10.2139/ssrn.313619

Zvi Bodie (Contact Author)

Boston University - Department of Finance & Economics ( email )

United States

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

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