Practical Finance: An Approximate Solutionto Life-Cycle Portfolio Choice

Research on normative household financial choices almost always gives guidance in one of two forms: a simple formula for an unrealistic setting, or a numerical solution for a particular set of parameters in a realistic setting. Neither is very useful for individuals trying to figure out optimal choices for their own situation. We propose a middle-ground approach, which we call practical finance: approximations to optimal solutions in realistic settings that are easily computed in a
spreadsheet. We provide such an approximation for lifecycle portfolio choice with non-tradable labor income within the canonical Cocco, Gomes, and Maenhout (2005) model. Across 2,187 different parameter sets, our approximation results in welfare that is on average only 0.02% lower than that of the optimal solution.