Abstract
Financial sustainability for individuals has become more important due to the increase in life expectancy. In personalized lifetime financial planning, human capital is critical for incorporating the life-cycle of individuals. This study focuses on human capital modeling based on features such as education level and working industry, and presents how difference in human capital can affect the optimal asset allocation. By analyzing the Korean labor and income panel survey data, fixed effects regression was performed to model human capital and a portfolio model that maximizes utility of total wealth is solved to optimize the lifetime financial plan. The empirical results show that individuals with human capital that are more correlated with stocks are advised to reduce allocation in stocks.
Highlights
IntroductionUses expected labor income for estimating human capital in financial planning
Capital Analysis in Korea.According OECD [1], the proportion of the population aged 65 and above increased from 9% in 1960 to 17% in 2017
This study addresses the growing concern of personal financial stability due to increased life expectancy by discussing models for life-cycle financial planning
Summary
Uses expected labor income for estimating human capital in financial planning It is shown in several studies that including human capital in portfolio models directly affects. It is advised to manage risk by reducing investment in stocks during periods when human capital shows high relation to shocks in the stock market [15,16] These studies on financial planning are becoming much more relevant in practice due to the need for securing financial stability after retirement for average individuals who cannot receive human-advising services. This concern that arises from longer life expectancy is alarming in Korea.
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