The life cycle theory states that individuals go through four different financial stages of life.  It is assumed that younger people who have many years before retirement are less risk averse versus an older individual who has less time to recover from a downturn in the market.

The four stages are as follows:

1.  Accumulation

• individual has just entered the work force, has relatively few assets and is facing significant debt (eg. mortgage, students loans, etc.)
• income is relatively low and priorities include meeting the expenses of daily living

2.  Consolidation

• income comfortably exceeds expenses either because income has increased or expenses have decreased (eg. mortgage has been repaid, children have become independent)
• a significant financial portfolio has been built

3.  Financial Independence

• an individual's living expenses are financed mainly through investment and pension income; the individual is no longer in the work force
• the financial portfolio is likely invested in blue chip securities

4.  Gifting

• as the individual realizes that his financial assets exceed his needs, he might decide to share the wealth with the family or charitable organizations

"Professional Financial Planning", Canadian Securities Institute, August 1999