Maximizing Retirement Income and Leisure Time

Boscaijon, Brian
July 2005
Journal of Financial Planning;Jul2005, Vol. 18 Issue 7, p46
Academic Journal
This article summarizes an individual life cycle model for use in the asset-allocation decision process for individuals who value time and money. The model assumes that individuals reach a critical point in their life when they desire to maximize leisure time in addition to financial wealth. The model provides the foundation for a dynamic asset allocation process that allows flexibility for the unique needs and preferences of an individual. Specifically, the model does not assume that individuals always solely maximize wealth and reduce their allocation in equities based primarily on their age. The individual life cycle model is built on the definition of total wealth provided by Zvi Bodie, Robert Merton and William Samuelson in their paper Labor Supply Flexibility and Portfolio Choice in a Life Cycle Model. Total wealth for an individual comprises human capital and financial wealth. Typically, financial planners reduce the allocation of more risky assets, such as equities, and increase allocation to less risky assets, such as bonds, at some arbitrary point such as ten years before retirement. The model presented in this article defines a critical time horizon and wealth level for individuals. The critical point represents the point in the life of an individual where leisure time becomes increasingly more valuable relative to financial wealth. The model reflects the conversion of human capital to financial wealth over the working years of an individual. The model assumes that individuals make informed decisions about current versus future consumption as well as the allocation of time between leisure and labor. Reasonable retirement goals are set as a function of current wealth, expected savings, expected returns and a desired standard of living after retirement. INSET: Executive Summary.


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