This handout reproduces ﬁgures from ? showing the proﬁles of income and consumption by age across diﬀerent occupation groups from the 1960-61 Consumer Expenditure Survey. The unconstrained perfect foresight/certainty equivalent life cycle model implies that there should be no relationship between the pattern of the consumption proﬁle and the income proﬁle, since the shape of the consumption proﬁle is determined by tastes independently of the shape of the income proﬁle.
In practice, there seems to be a strong connection between the income and consumption proﬁles. The second set of ﬁgures shows the implications of a “buﬀer stock” model of optimizing life cycle behavior in which consumers are modestly impatient, have a standard CRRA utility function with a precautionary saving motive, and face uncertain income. Consumers in this model optimally engage in buﬀer stock saving behavior until 10-15 years before retirement, as a result of their combination of impatience and prudence. This model is thus capable of matching the broad pattern of the data.