Defining an Individual’s Critical Wealth Level

Abstract

The author uses an expected utility function of time and wealth to define an individual’s critical wealth level. Traditional asset allocation models are based on modern portfolio theory’s assumptions that individuals are homogenous wealth maximizers who have the same time horizon. These assumptions are questioned beyond the critical wealth level. Individuals often retire voluntarily once a target wealth level is obtained that optimizes their desired sustainable consumption and amount of leisure time. The critical wealth level is an important reference point that provides a theoretical basis for the start of the reduction in risky asset allocations for individuals who value leisure time and wealth.

TOPICS: Wealth management, portfolio theory