Practical Finance: An Approximate Solution to Lifecycle Portfolio Choice

James Choi, Canyao Liu and Pengcheng Liu

No 34166, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Research on normative household financial choices almost always gives quantitative guidance in one of two forms: a simple formula for an unrealistic setting, or numerical solutions for only a few parameter sets in a realistic setting. We propose a middle-ground approach we call practical finance: analytic approximations to optimal solutions as a function of relevant parameters in realistic settings that are easily computed in a spreadsheet. We provide such an approximation for lifecycle portfolio choice with labor income. Across 5,103 parameter sets, our approximation results in welfare that is on average only 0.06% lower than that of the optimal solution.

JEL-codes: D14 G50 (search for similar items in EconPapers)
Date: 2025-08
Note: AG AP
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