Consumption

Consumption is another word for spending. This is fairly stable over the lifetime, with a slight increase as people get older.

Earnings

Earnings increase over the lifetime as skill level and experience increases. This may be less true today as often people change career more often, have side hustles and due to the economy, recessions etc wages have been fairly stagnant.

Loans

To afford higher consumption when younger, some people take out a student loan to cover expenses. This is also an investment as its hoped this expense in education and skills when young, pays off with a higher salary in later life. This student loan covers the gap between consumption/spending and earnings. Another loan people take out is a mortgage where they borrow from the bank to buy a property, again this loan covers the gap between spending and earnings.

Saving

In middle age people have typically built up their wealth and savings. Paying towards their mortgage, paying a lot into a pension(s) and investing. Generally they spend less than they earn so savings are above consumption levels.

Retirement

In retirement earnings stop from employment. This is where earlier investment in education leading to a higher paid job (in theory) and saving throughout earning is now paying off. People have passive income from their investments – the interest earned. Plus people have their pensions to live off of. As people are living longer having a big pension is becoming more important than ever, especially as the UK state pension becomes less viable due to ageing demographics. Its my cynical personal view that with the introduction of workplace pensions, over time the state pension will be reduced (this has not been indicated by the government so don’t panic!). The pension age has risen a lot though so expect to work a lot longer.

Blueprint

This pattern of people borrowing, saving, then living off the savings (pension) has been fairly typical. It will not hold true for many people and is just a general theory, however it is useful to think about as a blueprint.

Intergenerational Lending

Young people borrow more and older people have excess money saved. The banks lend this excess money from the elderly to the young. You don’t know this is happening as its done through the banks. This allows young people to borrow and for the economy to grow. It also shows how its normal to borrow to try to build wealth, which takes a long time! and how its important to have excess wealth for your retirement when you stop earning.

Banks help lend money intergenerationally, from older people that generally have more, to younger people that have less.

Investments

This pattern of saving and spending usually results in younger people taking greater investment risks when younger attempting to get higher returns. With older people taking low risk investments to not risk their pensions declining when they have started withdrawing them.

Exceptions

The theory assumes wealth isn’t passed onto children etc, that consumption is stable when it might actually vary more throughout someone’s lifetime. It also assumes people work more when young and not when elderly etc. There’s also a disincentive to save if there are high benefits which are means tested