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 income dependent on sales, commissions, or vesting of your equity stock compensation e.g. the VP of Sales in a Marketing Firm? Or is it more stable, predictable, and uncorrelated with the market e.g. a teacher?

If you died would there be a huge impact on your family’s current and future earnings?

Is there a possibility that you outlive your assets, either because you live longer than expected or because your assets unexpectedly decline in value?

Designing an investment strategy that considers where you sit on the seesaw and balancing the risk between growth and income assets will help investors transition from their working life into retirement.

Ignoring your human capital can lead to skewed asset allocation, concentrated positions, and overconfidence.

The ultimate goal is that in financial independence you should be able to maintain the standard of living you enjoyed in your working years.

Adviso Wealth is dedicated to working with people just like you. We want to give you the clarity and confidence you need to achieve your personal and financial goals.

To learn more, visit advisowealth.com or email sweta@advisowealth.com