Consumption Smoothing

DEFINITION of 'Consumption Smoothing'

The ways in which people try to optimize their lifetime standard of living by ensuring a proper balance of spending and saving during the different phases of their life. Those who overspend and put off saving for retirement to enjoy a higher standard of living often have to work longer or reduce their standard of living in retirement. Those who over save will live a more frugal lifestyle while working to enjoy a better lifestyle while retired. In each case, the overall standard of living is less than optimal.

BREAKING DOWN 'Consumption Smoothing'

Saving for retirement is a delicate balancing act. By having a a better understanding of the saving and spending requirements to smooth out standard of living, one can have a a better overall standard of living, at least in theory. But this is easier said than done, and striking this balance is one of the major challenges of financial planning.

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