Shocks to Income in a Lifecycle Model: An Undervalued Risk

Morningstar

Sebastian Gomez Cardona

Research

47 Pages

Morningstar Retirement integrates income risk into lifecycle investing models that guide saving and asset allocation across an investor career. The author argues that ignoring permanent and transitory income shocks leads to understated risk and overly optimistic glide paths. Younger investors, in particular, may need to save up to 3% more of their labor income.

Date published: July 2025

Source: Morningstar Retirement using data from the PSID. As of July 2025.

Key Takeaways

Income shocks defined: Distinguishes between permanent and transitory income changes and explains how both reshape lifetime earning paths.
Human capital framing: Connects industry specific income risk with the implicit equity and bond mix in human capital.
Planning implications: Emphasizes higher precautionary saving and more tailored equity exposure by age, wealth and career.
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