The Effect of Baby Boomer Retirements on the Stock Market

The Effect of Baby Boomer Retirements on the Stock MarketHave you ever thought about what will happen to the stock market as the Baby Boomers approach retirement and begin moving their money out of equities? I have, and I find the prospect a bit disconcerting.

After all, markets are driven by supply and demand. If a bunch of Boomers start selling to meet their needs and prices dip, others might sell to avoid a loss, thereby causing a greater drop, and so on.

I was thus very interested when I ran across an article in USA Today by John Waggoner on this very topic. The first of the Boomers will be turning 65 next year, with tens of millions to follow in coming years. This begs the question:

“If Boomers follow the usual pattern of shifting their portfolio mix toward income-generating investments — bank CDs, bonds and dividend-paying stocks — will the stock market’s long dry spell drag on?”

But will boomers really shift to a dramatically more conservative asset allocation? In theory, they should, and Jeremy Siegel (author of Stocks for the Long Run) has argued that stocks could plunge by as much as 50%.

At the same time, it’s been argued that this demographic shift won’t be enough to overwhelm other market forces. Rather, political and economic events could wind up being far more important. Beyond this, it’s not clear that Boomers will sell, or at least not all at once.

Why Boomers won’t sell

In many cases, boomers already hold a well-diversified portfolio, so there won’t be a precipitous change. In addition, those with the largest portfolios are more likely to be concerned with passing their wealth to the next generation (estate tax be damned!) than they are with preserving principal in the short-term.

But what if they do?

Waggoner argues that, even if they do ultimately sell their stocks, “any movement the Boomers make will be gradual at best, ” and might be slowed further by the currently low interest rates. I agree with this to a point, but rates won’t stay low forever, and the average Boomer will liquidate stocks over time.

Perhaps the most compelling argument in favor of a healthy stock market in the face of mass Boomer retirements is that Gen Y (those born 1983-2001) is coming of age, and it’s actually slightly larger than the Baby Boomer generation. These individuals will need to save and invest, and will thus help to offset Boomer liquidations.

What do the Feds think?

While researching this topic, I ran across an interesting report from the Government Accountability Office (GAO). In it, they tackled the issue of whether or not Boomer retirements would precipitate a stock market drop.

“Our analysis of national survey and other data suggests that retiring boomers are not likely to sell financial assets in such a way as to cause a sharp and sudden decline in financial asset prices. A large majority of boomers have few financial assets to sell. The small minority who own most assets held by this generation will likely need to sell few assets in retirement. Also, most current retirees spend down their assets slowly, with many continuing to accumulate assets. If boomers behave the same way, a rapid and large sell off of financial assets appears unlikely.”

The report also pointed to an increase in life expectancy as a mitigating factor, as a longer lifespan will translate into Boomers working past traditional retirement age as well as a greater spread in the timing of asset sales.

What do you think?

So, dear readers… What’s your view? Do you anticipate stock market troubles due to Baby Boomer retirements and the accompanying asset liquidations? Or do you think other factors will overwhelm the “Boomer Effect”?

I’m currently on the fence. It’s hard to ignore such a huge demographic shift, but there’s a lot of data out there suggesting that there won’t be much of an impact. For now, we’re sticking to our plan, but will be keeping a close eye on any further research on the topic.

18 Responses to “The Effect of Baby Boomer Retirements on the Stock Market”

  1. Anonymous

    deflation!!! cheaper bugers, cheaper beer, cheaper gas, cheaper stocks!!!!deflate it!!!! stop buying stuff that’s too expensive… live with less… deflations actually normal. If you study normal inflationary deflationary cycles since 1700’s a normal economy has cyclical inflation and deflation.. it wasn’t until the baby boom gen came around that inflation really started.. with so many people tired of being hippies all working and spending and driving at the same time inflation hit double digits in the 70’s.. the fed really had to hammer on the rates to cool things. There has never been rates like that. We have had constant inflation from 1955 to 2009. Never in history, back to revolutionary war records, did the US see that kind of inflation. If you draw a trend line of the stock market since 1905, one can notice that 2009, how bad it seemed, only touched average prices. That was flippin par value… Its not that things were so bad, its that prices have been too high for way too long… Now what to do… where to park cash… deflation would be awesome. Im already buying oats by the bushel. dirt cheap. suitcases of beer for 13 dollars is looking up. Forget about cheeseburges, beef is prices are stupid. Id rather eat rabbit food and beans. I can grow my own cabbage and the phinest kind of vegetables. who needs store bought crap except in winter. Cottons cheap too, well relatively. Look for 30% off to long term average prices. Don’t keep buying overpriced anything. And f the credit card and china too.. God bless putin the skills to solve this crap with out nuclear war. And Iraq too. and make ebola go away.

  2. Anonymous

    wondering the same thing. If retirees start to sell to pay for medical, insurance, retirement etc. it could really slowly deflate the entire stock and bond fund market. Perhaps it has been happening since 2000. Perhaps that is why the treasury and bond market is so overbought, the fed cant afford to keep paying interest rates like its 1984. I think were in for another good correction to position trade the market, but buying and holding could be really bad. It seems that the only reason we are having this unusually long bull market is that the fed qe stimulated the economy. keeping the interest rates so low facilitated lending for the borrower and free cash flow improved. Who in their right mind would want to buy premium treasury yielding negative. nothing but dividend stocks. Even they don’t pay. Im sitting on cash. My nest egg is rotting slower than than a market crash anyhow. Makes no sense to buy stock at todays price, start measuring intrinsic values at a 25% dcf and youll see how overbought the market is. Makes no sense to buy bonds. Makes no sense to work for these lousy wages either. Im retired at 38 until the job market improves. Working for peanuts is a waste of time. Get worn out working for nothing, back and hands will hurt when I need them most. I started working in a factory in 1988 at age 12. Relative to the minimum wage, and the cost of cheeseburgers gasoline and other consumer goods, If I work for minimum wage today, I would be better paid as a 12 year old. Id rather be fishing and poor than lower myself any further… BA degree from major university, 3.33 GPA experience, lots of beer and a 139 IQ. The pay still sucks even when your overpaid in todays market. Im cheering for deflation!!!

  3. Anonymous

    China & India buy our stocks? We want them to own our American companies? Upcoming generations replace the withdrawals as Babyboomers retire and seek safer havens?
    It’s a pipe dream! Sure the stats looked good enough to remove fears a few years ago. Ask ANY Babyboomer you know if they trust the markets with their retirement funds NOW! Bet the results of a survey would remove any doubt of slow steady withdrawal. So where does that leave the market once the current unfounded rush reach a climax before the end of the quarter? In a rather rapid decline based on actual deflation data and the fear which will drive the market. Recovery? Recovery from a temporary over exuberance and a rather steep sell off. This downturn is matching the stats perfectly (in spite of all the efforts)of our last great fear driven crash. It ain’t over till it’s over! Tell the 99’s who are living on the street soon and cannot get any state or welfare aid because they cannot find jobs that it’s over. They are starting to believe the American Dream is over…..for them it well may be so. We need a work program like the 1930’s WPA to repair our bridges and roads etc. Printing extra money for the banks and business concerns has only kept them afloat. Americans need help with jobs and THAT is the only thing that will save our industries in the long run.

  4. Anonymous

    If the boomers have shares in IRAs they’ll have to start pulling the money out yearly beginning at age 70 1/2, because it’s required by law. That creates a drag on prices.

  5. Anonymous

    I’m not so sure I can get behind the idea of Gen Y being the net buyers against the Boomers’ net selling. The reasons range from: perhaps Gen Y – witnessing the carnage happening to their parents’ retirement funds – may become permanently scared away from investing. To: a simple anecdote about Gen Y being coddled and spoiled since birth and not having the same kind of work ethic and big picture thinking that previous generations have displayed.

    Just a thought…

  6. Anonymous

    As big as the baby boomer generation is, I do not think they are big enough to significantly bring the stock market down much. There are so many hundreds of thousands of 401(k)s and others invested in the market that it should balance things out just fine. And as the author said, the Gen Y generation will continue to be investing more and more as they continue growing up and getting jobs.

    Not only that but as some other commenters have said, a lot of baby boomers probably do not have enough to truly retire. Also, so many of them have lost a significant amount of their portfolios in the last few years. I wouldn’t be surprised if they stay invested longer to see if they can keep working. Either that or they will just keep working.

  7. Anonymous

    I wonder when this entire house of cards will come completely tumbling down, because I think it is a combination of fear and misinformation that drives the actions of the stock market.

    If all the “boomers” decide that the stock market is too risky and that based on the crash two years ago they need to pull all their money out who is really going to take their place? If the younger generation sees the fear in the actions of their parents what incentive is there for them to invest?

    Just a thought…

  8. Anonymous

    re: Trav Hey I had to laugh when I read your comment. Teachers around here have pensions but they’re not funded. I’ve always looked at that as a bad thing but now I see there is a silver lining! They don’t have to sell stock to send out the retirement checks. Maybe each county can have its own Federal Reserve and just create money out of thin air.

  9. Anonymous

    There’s some talk that boomers don’t have money in the stock market — because they have pensions instead. Well … where do you think those pension funds invest their money?

  10. Anonymous

    I thought I remembered reading a few years ago that a third of boomers have nothing for retirement outside of their home equity. I’d be more worried about another housing market drop as they start to liquidate that equity and downsize, than I would about the stock market dropping.

  11. Anonymous

    I’m with #1 Paul: boomers have nothing saved. In general most people never ‘retire’, unless you call getting too sick/weak/old to work a retirement.

  12. Anonymous

    That article quoting Siegel seems to have misunderstood him. Siegel has an entire book (The Future for Investors) about why, while that could happen, he doesn’t see it as likely because Indian and Chinese investors will step in to buy up our investments.

  13. Anonymous

    Considering a majority of companies now utilize 401(k) plans for new employee (i.e. 20-30 yr old) retirement planning instead of a company pension, the Boomers who are retiring and selling their stocks should be counteracted by new employees using their employers 401(k) plan. Thus, I agree with the “gradual to no effect” outlook.

  14. Anonymous

    I think that as long as safe investments remain so low in regards to any income they can generate with our low interest rate structure boomers will continue to stay in the market. They may just choose good companies that pay a great dividend yield. I think if you start seeing inflation or interest rates climbing and therefore a potential shift, that is when you would need to start getting worried. As interest rates go up stocks will fall. Currently in this sluggish economy I just don’t see that happening. With many boomers losing a good portion of their retirement plans many are planning on working longer too.

  15. Anonymous

    I have to agree with the GAO. All the statistics I’ve seen and my own personal experience from talking with people have shown me that Boomers have saved very little overall. Many don’t have a dime in the stock market. I don’t think we’re going to see any huge drops in the market due to Boomer retirements. As you mentioned in the post, political and economic factors are going to be the major market movers as they always have.

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