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Is The Stock Market Doomed When Baby Boomers Retire?

By: Investor Solutions

By: Investor Solutions, Inc.

Will your equities suffer when the baby boom generation decides to retire? There were 77 million baby boomers born between 1947 and 1964, that’s roughly 4.5 million a year. Many financial experts agree that the boomers, aggressively saving for retirement, are partly responsible for the surge in equity investments over the last several years. And some doomsayers are predicting the boomers will drain the equity markets of their capital once they retire. Should you worry? Are your equity portfolios at risk? It’s highly unlikely for many reasons.

As baby boomers near retirement, they will undoubtedly shift strategies, transitioning from the accumulation phase and into the capital preservation phase of their lives. I do not discount the rationale that as boomers retire, there will be some divestment from the stock market. In fact, it is expected, and sound for retirees to shift a portion of their investments from stocks to fixed income for capital preservation.

However, a portion of fixed income is not equivalent to “all” or “most” of their investments, as some of the doomsayers predict. Retired Boomers will likely live longer lives than the generation before them, have more active lifestyles during retirement, and may continue part time work or secondary careers “post retirement”. Numerous studies have been conducted on retiree distribution rates, all of which indicate that a healthy allocation to a diversified portfolio stocks is essential for ensuring the retiree does not outlive his cash. Therefore, all of these factors combined imply that the boomers will continue to own a substantial amount of equities during retirement.

Furthermore, who is to say that boomers are not already allocated to some degree in fixed income instruments? The assumption of the doomsayers is that boomers have little or no exposure to fixed income currently, thus creating a monumental shift from equities when the work years end. Many boomers have already begun the process of shifting some of their equities to bonds.

Perhaps the greatest fallacy in the argument that boomers will induce a stock market collapse is the idea that there will be a mass exodus of stock investors during a short time frame. This is a flawed presumption on two levels.

One, the span of time between the oldest boomer and the youngest boomer is eighteen years. So, assuming all the boomers retired at age 65, that would have the first boomers retiring in 2012 and the last of the boomers retiring in 2029, hardly a short term.

Second, the argument neglects to account for the mass migration into the stock market during the same period of time. Gen Xers and Echo Boomers (boomers’ children) will fill the void. From 1965 to 1999 there were 140 million babies born, roughly 4 million a year. Assume again that all individuals will retire at age 65. So, those born in 1965 would be only 47 when the first boomers retire in 2012 (leaving at least 18 years of savings/equity investing; and those born in 1999 will be 30 by the time the last set of boomers retires in 2029 (leaving another 35 years of savings/equity investing). Furthermore, The U.S. Census Bureau expects the domestic population to grow from 275 to 400 million in the next 50 years.

Finally, we cannot ignore the impact of immigration and foreign investment. The U.S. market is in fact, a global market, attracting throngs of non U.S. investors every day. Foreign investment is an integral part of this U.S. economy. Furthermore, immigration can have a potentially positive impact on the boomer retirement “challenge”, counteracting the effects of the stocks to bonds transition. Immigrants and the children of immigrants (the “new Americans”) will, no doubt, pursue their American dream and invest in this country and its markets.

So what’s the lesson here? The lesson is that there will always be opinions about what the market is going to do, whether it’s predicting the appropriate time to sell or buy a stock or the timing the mass exodus of the boomers from the market – none of it is worth a dime. Remember, that people make careers out of creating “spin” (just turn on CNBC or Bloomberg News for a day). The sky is not falling and the boomers will not collapse the markets when they retire, they simply can’t afford to!