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Investing 3: Smooth Spending & The 401K

Planet Money Summer School

CHAPTER

The Life Cycle Hypothesis - Why Consumption Is So Hard

There is an idea in economics called the life cycle hypothesis that tries to explain how people use consumption smoothing throughout their lives. So it starts when you're born, building up human capital through education. And then you're in your earning years - most your pay increases happen in your twenties and thirties. Then you get to middle age, and that's your sort of pique pay and it stays like that for a while. And thenYou retire, and then, ah, you then have hopefully built up enough savings,. You consume out of that in your irement, and then you dies a lifetimeand in 30 seconds.

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