This calculator estimates the optimal equity allocation across your
lifetime using the analytic approximation from Choi, Liu & Liu (2025).
The key insight: treat future labor income as human capital — a
bond-like asset — and adjust the classic Merton portfolio formula
accordingly.
Young workers with decades of future income have large human capital
relative to financial wealth, justifying higher equity allocations.
As human capital depletes with age, the optimal equity share declines
naturally — no arbitrary rule of thumb required.
Instructions
- enter your Age, Annual Income (in thousands), Savings (in thousands), and Retirement Age
- select your Education, Risk Tolerance, and Retirement Income %
- optionally adjust Equity Premium and Risk-Free Rate under Advanced Parameters
- check Compare Strategies to overlay common alternatives: 60/40, Age Rule, All Stocks, and All Bonds
- click GO to compute the allocation path
Results
- Optimal Equity Allocation — the recommended percentage of your portfolio to hold in equities at your current age, based on your inputs
- Human Capital — the present value of your future labor income, discounted for income risk and time; this is the bond-like asset that justifies a higher equity allocation when you are young
- H/W Ratio — human capital divided by your current savings; a high ratio means most of your total wealth is future income, pushing the optimal equity allocation higher
Notes
- Risk Tolerance maps to the relative risk aversion parameter (ρ) — higher ρ means more conservative
- Retirement Income % is the Social Security replacement rate as a fraction of final working income
- Equity Premium and Risk-Free Rate default to 4% and 1% respectively
Use Cases
- determine an age-appropriate equity allocation grounded in theory
- compare the recommended path against popular rules of thumb
- see how education, income, and risk tolerance affect the glide path
Further Reading