Life-Cycle Hypothesis (LCH)

Categories: Financial Theory

See: Life-Cycle Fund.

The Life-Cycle Hypothesis, or LCH, starts with the idea that people want to maintain a certain sort of lifestyle throughout the course of their lives. For the most part, this means that we tend to take on debt when we’re young, assuming we’ll be able to pay it off later, which means we’re not accumulating a lot of wealth.

As we are reluctantly sucked into middle age, we start saving—accumulating wealth—in preparation for the days when we’re retired and not earning, and therefore have a whole lot less disposable income.

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