Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance

In determining asset allocation, individuals must consider more than the risk–return trade-off of financial assets. They must take into account human capital and mortality risk in the earlier life-cycle stages and longevity risk in the later life-cycle stages. The authors show how to integrate these factors into individual investors’ asset allocations through a systematic joint analysis of the life insurance a family needs to protect human capital and how to allocate the family’s financial capital. The proposed life-cycle model then addresses the transition from the accumulation to the saving phases—in particular, the role (if any) of immediate payout annuities.