Practical Finance: An Approximate Solution to Lifecycle Portfolio Choice

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.