what is the life cycle hypothesis lch 
the life cycle hypothesis lch is an economic theory that describes the spending and saving habits of people over the course of a lifetime the theory states that individuals seek to smooth consumption throughout their lifetime by borrowing when their income is low and saving when their income is high the concept was developed by economists franco modigliani and his student richard brumberg in the early 1950s understanding the life cycle hypothesisthe lch assumes that individuals plan their spending over their lifetimes taking into account their future income accordingly they take on debt when they are young assuming future income will enable them to pay it off they then save during middle age in order to maintain their level of consumption when they retire 1a graph of an individual s spending over time thus shows a hump shaped pattern in which wealth accumulation is low during youth and old age and high during middle age life cycle hypothesis vs keynesian theorythe lch replaced an earlier hypothesis developed by economist john maynard keynes in 1937 keynes believed that savings were just another good and that the percentage that individuals allocated to their savings would grow as their incomes rose this presented a potential problem as it implied that as a nation s incomes grew a savings glut would result and aggregate demand and economic output would stagnate another problem with keynes s theory is that he did not address people s consumption patterns over time for example an individual in middle age who is the head of a family will consume more than a retiree although subsequent research has generally supported the lch it also has its problems the lch has largely supplanted keynesian economic thinking about spending and savings patterns special considerations for the life cycle hypothesisthe lch makes several assumptions for example the theory assumes that people deplete their wealth during old age often however the wealth is passed on to children or older people may be unwilling to spend their wealth the theory also assumes that people plan ahead when it comes to building wealth but many procrastinate or lack the discipline to save another assumption is that people earn the most when they are of working age however some people choose to work less when they are relatively young and continue working part time when they reach retirement age as a result one implication is that younger people are more able to take on investment risks than older individuals which remains a widely accepted tenet of personal finance other notable assumptions are that those with high incomes are more able to save and have greater financial savvy than those on low incomes people with low incomes may have credit card debt and less disposable income lastly safety nets or means tested benefits for aging adults may discourage people from saving as they anticipate receiving a higher social security payment when they retire who wrote the life cycle hypothesis lch theory economists franco modigliani and his student richard brumberg developed the lch in the early 1950s 