Abstract

Optimal Consumption, Portfolio Selection and Life Insurance for Financial Planning

T. Sachi Purcal

School of Actuarial Studies
University of New South Wale, Australia

This paper examines the question of lifetime personal financial planning---how should individuals determine their optimal consumption, portfolio selection and life insurance needs? Although Richard (1975) provides the theoretical basis for such a model, no numerical results from this model have been produced. The paper uses the Markov chain approximation method of Kushner (1977) to determine numerical results for Richard's model. This approximation method is general, and handles constraints to the model; solutions are developed with a borrowing constraint. The results are interpreted in light of financial planners' traditional rules of thumb for both investment in risky assets over one's lifetime and life insurance purchases.