Life Cycle Hypothesis

The Life Cycle Hypothesis suggests that individuals plan their consumption and savings over their lifetime, aiming to maintain a stable standard of living. People earn income at different stages—high during working years and lower in retirement—and they save during their earning years to fund their retirement. By balancing saving and spending throughout life, they ensure financial stability in old age without sacrificing current well-being. Essentially, it's about managing finances over one's entire life rather than just focusing on immediate needs.