Free «The Life Cycle Hypothesis» Essay Sample

The life cycle hypothesis model was founded by economists Irving fisher, Roy Harold, Albert Ando and Franco Modigliani. It suggests that people save while they earn to finance themselves after retirement.

The lifecycle hypothesis suggests that the saving cycle of an individual changes according to their stage in life. A typical pattern for a person begins with low savings since young people tend to borrow funds to finance their education and households purchases. By the time they get to old age, they have accumulated debts to pay off. Some debts are from their younger years and some for housing and the payments of their children's education and upkeep. There is also additional savings at this age for old age. When they get to old age, they start spending the savings and some bequeath wealth to their children. Some die in debt.

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The consumption pattern of an individual in his or her lifetime changes with his rate of earning and saving. When one is young, their consumption is mainly on education and household needs. It is a bit low as compared to middle age. The life of a middle age person consists of a bigger household, children expenses and investments while still saving causing the consumption rate to rise. At old age, most of the children have earnings so the consumption rate goes down again. On average, the net savings of a person are not a lot.

The life-cycle hypothesis suggests that the saving rate for an economy as a whole depends on, among other things, the relative number of savers. The relative number of savers in an overall economy will affect it. If there are more young and old people than middle aged ones, the savings will be less since they tend to consume more than save. Middle-aged people have more investments, and more savings that provide continuity in the economies cash flows. The hypothesis suggests that most economies experience a drop after two decades.

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