As children, the Baby Boomers strained the educational system, and as young adults, they strained the labor market.
And now, as the outsized, post-World War II generation approaches retirement, it has become abundantly clear it will strain the Social Security system.
What is less obvious–but equally disturbing to a number of observers–is the potential that the Baby Boomer generation’s retirement years will strain the nation’s financial markets, which are now thriving–thanks in no small part to Boomers’ investments.
“I do think there will be a period when we will see a sea change in the financial markets because of demographic changes,” asserted William Sterling, co-author of “Boomernomics” and head of global equities for Credit Suisse Asset Management in New York.
Theorists see a number of potential hazards ahead.
Problems will arise, one theory goes, as 76 million Baby Boomers begin to sell their assets to the next generation, the Baby Busters, who number only 41 million.
The idea is there will be a shortage of buyers when Boomers try to finance their retirements by selling off their stocks, bonds and real estate, Sterling said.
An alternate view is that Boomers will trim spending in their retirement years, curbing corporate profits.
The end result in either scenario would be a big chill–the equivalent of a big, wet blanket being thrown over a stock market that many Boomers have only known to be red hot.
“People who think they are rich will turn around and say, `Whew, I don’t feel so rich anymore.’ That will happen,” predicted Harry S. Dent, a San Francisco-based investment strategist and author of “The Roaring 2000s,” a book that predicts a continued bull market for the next decade while Boomers are in their peak spending years.
Nobody is predicting a 1929-style implosion when the first Boomer turns 65 on Jan. 1, 2011.
For one thing, the aging of the generation born between 1946 and 1964 is hardly big news to the markets, and for another, Boomer retirements will be spread over two or three decades.
“It likely will be a glacial force: slow moving and massive,” Sterling said.
And quantifying the potential damage is a tricky business, given the wide range of variables that could change in the next few decades.
At the more pessimistic end, Dent predicts a “grinding bear market,” in which the Dow Jones industrial average, after peaking at 40,000 a decade from now, falls back to 12,000 or 13,000 as Boomers retire.
Others, such as Stanford University economist John B. Shoven, see a less-dramatic shift.
“It wouldn’t surprise me in the least if returns were somewhat below average in the second and particularly the third decades of the 21st Century,” said Shoven, co-author of a study that projects net outflows from corporate retirement plans starting in 2025. “So instead of the 11 or 12 percent real rates of return we’ve had since ’82, we may have a decade of 5 or 6 percent, and demographics are part of the explanation.”
Shoven and a number of other economists had been more pessimistic just a year or two ago, but they see a number of factors that could counterbalance demographic shifts.
Demand for U.S. equities could rise in developing nations if incomes in those countries continue to grow, noted Jeremy J. Siegel, professor of finance at the Wharton School of the University of Pennsylvania and author of “Stocks for the Long Run.” As well, an increase in economic productivity in the U.S. could boost the buying power of post-Baby Boom generations, he said.
Meanwhile, Shoven foresees U.S. corporations responding to older shareholders’ needs for cash by offering share repurchases or greater dividends.
“They will put cash in the mailboxes of shareholders . . . so the shareholders won’t have to do as much discretionary selling,” he predicted.
Boomers may not be so quick to sell anyhow, noted Sylvia Pozarnsky, partner in charge of personal financial counseling at Ernst & Young in Chicago.
The general trend among retirees–to lessen their exposure to equities and increase their holdings of bonds, certificates of deposit and the like–is changing because people are retiring earlier and living longer, she said.
Faced with lengthy retirements, investors are willing to live with the higher risks of equities in order to reap their generally higher returns, she said.
Indeed, a good many mainstream economists contend there are way too many variables to predict what the market will do when Boomers retire.
“It’s an extremely open question,” said Deborah Lucas, professor of finance at Northwestern University’s J.L. Kellogg Graduate School of Management.
Still others say retirement-savings trends have little effect on the market. “By and large, stock prices are determined by expectations of earnings and interest rates, and far less by savings rates,” said Robert Z. Aliber, professor of international economics and finance at the University of Chicago’s Graduate School of Business.
And the issue is hardly a top-of-mind concern among individual investors yet.
“At this point I’m not losing any sleep over it,” said Mark Boge, a 47-year-old account executive with Conrail Inc. in Chicago.
“My personal feeling is we’re all healthier and so we’ll live longer, so we’ll probably continue to invest in the stock market . . . so the market hopefully will continue to thrive,” said Boge, a disciplined saver whose portfolio is 90 percent equities.
Nevertheless, a number of financial advisers say the prospect of a soft market during Boomer retirement years does come up in discussions with clients.
Their advice is fairly straightforward:
– Keep saving. “A lot of people are assuming they no longer need to be saving, that appreciation is doing it for them–and that’s a very dangerous mindset,” said Eleanor Blayney, a financial planner in McLean, Va.
– Keep your portfolio diversified. “People get caught up in the stock market bubble,” said Mark Bell, a financial planner based downtown. “It’s harder to get people to buy bonds in this environment, no question about it.”
– Ride demographic trends. Dent and Sterling recommend investments in sectors that stand to benefit from the aging of the Baby Boomers, such as financial services and health care.
– Adjust your expectations. “Some people who are counting on the rather incredible returns of the last 5, 10, 15 years will have to revise their plans and save more,” Shoven said.
“I don’t think people should change their asset allocations away from stocks–that would be a mistake,” he said, noting that if a softening of markets occurs, it will affect long-term bonds and housing, too.
“If you’re trying to avoid this effect, there is not much of a way to do it,” Shoven said. “You’re not going sit out 25 years in Treasury bills–that has never worked and it probably never will.”
