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This chapter is from the book


  • The typical 40-year-old has almost $50 of debt per $100 of assets. Overall, the typical family unit has $30 of debt per $100 of assets. The median amount of money in retirement accounts is a mere $35,000, and 50% of American families do not have any retirement account. All this implies that many Americans will have to drastically reduce their standard of living at retirement or retire much later than they expected.
  • The traditional accounting measures of personal financial net worth and equity, which is computed as the value of assets minus the value of liability.
  • Even though you might have very little if any financial equity, you are wealthier than you think. In fact, you probably have an asset worth millions of dollars. It's called human capital. Think of it as the "nest embryo" which will eventually become your "nest egg."
  • As you age you convert human capital into financial capital. Your total capital, which is the sum of both types of capital, should be increasing over time.
  • Depending on how risky your job is, you may think of your human capital as a stock or as a bond or some combination in between. This analogy will come in handy later, when we talk about comprehensive asset allocation—considering both your human and financial capital—over the life cycle.
  • In particular, individuals who expect to receive little or no income from a defined benefit pension plan must be even more careful to manage the conversion of their human capital into financial capital so that they secure a smooth income stream over their entire life cycle.
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