What consumption theory suggests that people plan their spending based on their lifetime income?

The life-cycle hypothesis suggests that people plan their consumption and saving around expected income over their entire lifetimes.

Franco Modigliani and Richard Brumberg developed the model in the 1950s, arguing that individuals typically borrow or draw down savings when young, save during their prime working years, and spend accumulated assets in retirement. This produces a characteristic hump-shaped pattern of wealth accumulation.

The theory differs from the permanent income hypothesis, associated with Milton Friedman. Both look beyond current income, but the life-cycle hypothesis emphasizes age, retirement, and lifetime financial planning, while permanent income theory focuses on expected long-run income and temporary income shocks.

Actual behavior can depart from the model because of borrowing limits, uncertain lifespans, bequest motives, pensions, health costs, and precautionary saving.