文档介绍：Chapter 5: Life-Cycle Financial Planning
Objective
Human
capital, permanent e
decisions over
life cycle
Consumption over the Life Cycle
You are currently 35 years old, expect to retire in 30 years at age 65, and then to live for 15 more years until age 80
You current e is $30,000 per year, and you real labor e adjusted for inflation remains at $30,000 per year until age 65
The real rate of interest is 3% per year
Assume you plan to consume a constant stream of the same amount in each of the next 45 years, denoted by C
Target Replacement Rate of Preretirement e
You should aim for a replacement rate equal to 75% of your preretirement e. That is *$30000=$22,500.
Consumption over the Life Cycle
Consumption over the Life Cycle
— Permanent e
— Human capital
See Excel
The Inter-temporal Budget Constraint
i = real interest rate
R = number of years to retirement
T = number of years of remaining life
W0 = initial wealth
B = bequest
The Optimal Choice: Optimization Model
The economists usually research the optimal choice of agents under intertemporal budget constraint.
a feasible plan
Omar’s Problem
Dr. Omar has just graduated from medical school at age 30 and has started training to be a surgeon.
His real salary for the next five years will be $25,000 per year. pleting his residency, Omar expects to earn $300,000 per year in real terms until he retires at age 65. Assume that the real interest rate is 3%.
If he wants to maintain the same level of consumption until his life expectancy 85 years old, should Omar allocate his wealth?