Lifecycle

(TODO: improve)

Human capital

Poeple who work for a living earn a bond-like, more or less inflation adjusted return. Generally the curve is not earning money, then earning a bit of money, then earning more money, then retirement. Taking this into account into a portfolio as an asset can be useful and potentially risk-reducing. The main idea is to use “lifecycle investing” by borrowing from your future income to fund diversifying assets in the present. In practice that means levering up when you are young and then slowly deleveraging as your human capital is transformed into actual capital. However, it is hard to estimate your human capital. If someone is persuing early retirement it is even more tricky.

Life

The book “Die with Zero” has a good overview of the stages of life, and the value of money in each stage. Borrowing for consumption while you are young is not necessarily a bad idea. People who get kids in their thirties can also be underfunded. Retirement is a lot less fun and much more expensive to do things if your health is deteriorating.

Death

For our consumption it would be very helpful to know exactly when we will die. Because we don’t, we either need to keep a safety buffer or some kind of insurance. Annuities should be the answer (the “annuity puzzle”), but are not always easy or practical.