How Much Should Be in Stocks? — Choi, Liu & Liu (2025)

Note: This is a student summary of an academic paper for educational purposes only. It does not constitute financial advice. Based on: Choi, Liu & Liu (2025), "Practical Finance: An Approximate Solution to Lifecycle Portfolio Choice," NBER Working Paper 34166.

01What problem are they solving?

How much of your savings should be in the stock market at every stage of your life? Three Yale researchers — James Choi, Canyao Liu, and Pengcheng Liu — found a formula you can calculate in a spreadsheet that gives a personalised answer based on your own circumstances, and it's almost as good as a supercomputer solution (only 0.06% worse in lifetime terms).

02Your job is like a giant bond

Your total wealth has two parts: your savings (bank, super, investments) and your future paychecks — all the income you'll earn for the rest of your working life. You can't sell this on the stock market, but it's real wealth.

The key insight: as long as your pay doesn't move up and down in sync with the stock market — which is true for most people — your future paychecks behave like a safe bond you already own. So the more future paychecks you have relative to your savings, the more stocks your savings can hold.

03How does the formula work? A worked example

Let's walk through the formula for a 36-year-old earning $1,600/week ($83,200/year), with $100,000 in savings and super.

STEP 1

Work out your baseline stock percentage

This is the percentage you'd hold if you had no future income at all. It depends on expected extra stock returns, volatility, and risk comfort.

Baseline = (extra stock return + ½ × volatility²) ÷ (risk comfort × volatility²)

Using: 2% extra return, 18.5% volatility, risk comfort of 7 → 15.5%

For moderate risk tolerance and conservative return expectations, the baseline is only 15.5%. Most of the formula's power comes from the next step.

STEP 2

Work out what your future paychecks are worth today

Add up all the income you expect to earn, adjusted downward because money in the future is worth less than money today. The authors worked out the right adjustment factor — about 7.7% per year for a 36-year-old with typical income risk.

Using this rate to discount 30 years of working income ($83,200/yr) plus 34 years of retirement income ($49,920/yr at 60% replacement), the total present value is approximately $1,095,000.

STEP 2b — HOW DO YOU DETERMINE YOUR INCOME RISK?

Picking your income stability tier

Permanent income risk = changes to your earning power that stick (promotion, redundancy, industry decline). This has 150× more impact than temporary risk.

Temporary income risk = one-off good or bad years (overtime, reduced hours). Barely affects the answer.

Stability Tier	Risk	Who fits here
Low risk	0.102	Government, healthcare, teaching, utilities — stable salary, hard to fire
Medium risk	0.103	Most salaried workers — office jobs, trades with steady demand
Higher risk	0.130	Commission, self-employed, contractors, startup employees

Moving from low to high risk increases the discount rate by ~2.5 percentage points, which decreases human capital and recommends fewer stocks. Riskier income = weaker "bond" = need more actual bonds.

STEP 3

Combine savings and future paychecks

15.5% × (1 + $1,095,000 ÷ $100,000) = 15.5% × 11.95 = 185% → capped at 100%

Future paychecks ($1.1M) are 11× larger than savings ($100K). Almost all real wealth is in future income, so the formula says 100% stocks.

STEP 4

How savings level changes the answer

Savings	Ratio	Stocks %
$50,000	21.9×	100%
$100,000 (our example)	11.0×	100%
$200,000	5.5×	100%
$400,000	2.7×	58%
$800,000	1.4×	37%

04How good is it compared to common advice?

Their Formula

0.06%

Essentially free

"100 Minus Age"

2.00%

33× more costly

60/40 Forever

3.75%

63× more costly

05Three ages, three allocations

Just starting out

Income$55,000/yr

Savings$15,000

Future paychecks~$1,800,000

Stocks100%

100%

Peak earning years

Income$120,000/yr

Savings$600,000

Future paychecks~$1,350,000

Stocks50%

50%

Retired, on pension

Pension$40,000/yr

Savings$800,000

Future pension~$550,000

Stocks26%

26%

74%

06What changes the answer?

More comfortable with riskMore stocks

Less comfortable with riskFewer stocks

Stable job (teacher, nurse)More stocks

Volatile job (contractor, sales)Fewer stocks

Higher expected stock returnsMore stocks

Income moves with stock marketFewer stocks

Generous pension/superMore stocks

Higher interest ratesSlightly fewer

07What's the bottom line?

Your job is your bond allocation. The younger you are, the bigger that invisible bond is, and the more stocks your savings should hold. As you age, your savings take over from your paychecks — and your portfolio should reflect that shift.

Interactive Calculator

Try It Yourself

Enter your details below — the allocation updates instantly.

About You

Age36

Annual income (before tax)

$1,600/week = $83,200. Enter gross annual salary or typical yearly earnings.

Total savings & investments

Include super, savings, shares, investable property equity.

Retirement age67

Risk Comfort

How comfortable are you with risk?7

Moderate — you'd tolerate a 15–20% drop without panic selling.

Income Stability

How stable is your income?

Does your income move with the stock market?

Market Assumptions

Real risk-free rate2.0%

Real return on safe assets. Currently ~1.5–2.5% in Australia.

Equity risk premium3.0%

Extra return from stocks over bonds. Historical ~4–6%, forward estimates ~2–4%.

Retirement replacement rate60%

Fraction of final income in retirement (super drawdown + pension). 50–70% typical.

Recommended Stock Allocation

100%

Stocks 100%

Baseline (no income)15.5%

Human capital$1,095,000

Human capital ÷ savings11.0×

Market correlation adj.None

Discount rate7.70%

vs Common Rules

This formula

100%

100 − age

64%

60/40 rule

60%

Your Allocation Over Time

223550658095