Abstract

This article presents a comprehensive, dynamic asset allocation framework for retirement savings, extending the classical Merton model to include human capital. This framework reconciles the intuitive age-based glide path with financial theory, recognizing that total wealth consists of financial capital and the present value of future contributions. It shows that the optimal allocation of risky assets depends on the ratio of human to financial capital, risk aversion, investment horizon, and key market parameters, such as the risk premium and volatility. Under CRRA utility, closed form solutions are derived, demonstrating that continuous contributions increase risk exposure relative to the constant-mix strategy. The article also compares glide path strategies with constant mix approaches, revealing that glide paths generally provide better downside protection and higher probabilities of meeting retirement goals, while dynamically adjusting risk exposure over time. The analysis further examines the shape of the glide path and shows that practical constraints, such as leverage limits, time-varying risk aversion, and rising contribution patterns, transform the theoretically convex allocation path into the empirically observed concave form.

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