The Balancing Act: Financial Capital vs. Human Capital
When people think about retirement or Financial Independence, there are two sources of funding for it: Financial Capital (current savings) and Human Capital (Expected Future Earnings). Financial Capital is the cash, stocks, and assets a person has accumulated. It is the market value of your portfolio. Human Capital is the present value of your future wages. As you might imagine, there is a relationship between one's age and the amount of human capital or financial capital you possess. The older you are, the more financial assets you have had time to accumulate. On the other hand, since you're older you have fewer earning years remaining. The younger you are the more time you have to earn income and so more human capital. The delicate balance of this changes over time. Most people focus on the asset allocation of their financial capital. How much they have in stocks, bonds, real estate, and cash. However, considering the nature of your human capital is important: Is your inc...