The Life Cycle Hypothesis

The Life Cycle Hypothesis suggests that individuals plan their consumption and savings over their lifetime to maintain a stable standard of living. People earn income mainly during their working years, save part of it, and then spend those savings during retirement when their income drops. This behavior helps smooth out their consumption patterns, ensuring they can enjoy a consistent quality of life throughout different stages of life. Essentially, people save when they earn more and spend their savings later when they earn less, balancing their finances over their lifetime.