Life Cycle Savings Program

Financial planning for the future will be right at your finger tips with the Life Cycle Savings program.

The program helps families plan for retirement over their entire family life cycle. Using individual planned retirement ages, current assets, future income patterns and savings goals. It can recommend a rational plan for spending and saving for a lifetime.

Audience: In classroom use, college students can benefit from the insights provided by this program. For workshop use with individuals or couples at least 10 years away from retirement.

Selected Sample Screens

Screen 1
After clicking on Screen 1 above, just click on Next Screen to continue, and click on the Back tab in your web browser to back up. Remember that these are just images of screens, not the actual program. You must run the Life Cycle Savings Program in one of three computer labs at Ohio State University (Campbell 119, Baker 590, or main library) or contact Sherman Hanna about obtaining the installation file for the program.

Sample Output Screens

Below is a set of sample outputs based on a different scenario using the Life Cycle Savings/Portfolio Program. All amounts are in constant dollars. In the example, Jane has no financial assets or liabilities as of her 25th birthday. She has an annual gross salary of $25,000, and a salary after taxes of $19,432. She projects that her gross salary will grow to $40,000 by age 64, then she will retire on her 65th birthday. Her only pension will be from Social Security, with an estimated annual benefit of $10,259. The program recommends that she initially save 5% of her takehome income, and gradually increase the percentage to 18% by age 64. If she follows the spending and saving recommendations of the Life Cycle Savings program, her portfolio will grow to $266,832 by age 64. The program assumes that just over $200,000 of that amount will be used to purchase a life annuity that will supplement her Social Security pension, allowing her to maintain her preretirement spending of $24,093 per year.

Example of year-by-year recommendation for spending, saving, and accumulated financial assets Not in exact format of program
Graph of Spending and Income by Age
Graph Saving as % of Income by Age
Graph of Financial Assets by Age

The Life Cycle Savings Program also gives portfolio recommendations. In this example, the program recommends that Jane initially her invest her money aggressively, with 87% of her contributions going into a small stock fund. The recommendation starts becoming more conservative after age 45, with the portion suggested for the balance in stocks gradually decreasing and the portion suggested for bonds increasing.

The recommendations for investing are conservative, assuming that one already has an adequate emergency fund, and there are no short-term saving goals. (One should always pay off credit card debt before doing any investing.) If a family is investing for retirement, and is sure it will not need the funds until retirement, a very aggressive portfolio, such as all small stocks, may be rational. (See article on this topic.)

However, the Life Cycle Savings Program makes the assumption that the investor is somewhat risk averse, and has a five year horizon, even when young. On the other hand, the program takes into account the idea that the employment income of the household represents human wealth. This can be seen in the table and first graph below, which show the financial asset accumulation as a percent of the household's total wealth, including human wealth. (For more on this idea, see this article.)

The article "Subjective and objective risk tolerance: Implications for optimal portfolios" describes the assumptions behind the portfolio recommendations of the Life Cycle Savings Program.

Financial Assets as % of Wealth, and Portfolio Recommendations, by Age
Note: The program recommends allocating contributions to long term investment funds among large stocks, small stocks, corporate bonds, and intermediate goverment bonds, based on how large the portfolio is relative to total wealth, including human wealth. See above paper for more details.

Graph of Financial Assets as Percent of Wealth by Age
Graph of Recomended Portfolio Allocation by Age