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.