For the last 40 years or so, many baby boomers have saved and invested diligently for their retirement.
Now they may face a much different challenge: finding buyers for the mutual funds, individual stocks and other assets they’ll need to sell to pay for their golden years.
The demographic bulge of the 70-million-some boomers has driven U.S. economic and market trends in each decade since World War II. They powered the housing market for much of that period, inspired an explosion of brand-name consumer goods and, in the 1980s and ‘90s, helped stoke the greatest stock bull move of all time.
Today they are an ever-expanding gray shadow on the national landscape: Every 24 hours for the next 19 years, an average of 10,000 boomers will turn 65.
By 2030, the number of Americans 65 and older is expected to reach nearly 72 million. That would be a 78% jump from 2010, according to Census Bureau estimates. By contrast, the age cohort of 45- to 64-year-olds — many of whom presumably will be accumulating significant investments in the next two decades — is expected to rise just 2% to 83 million in the same period.
With that kind of lopsided societal shift underway, the question for the aging would-be sellers of stocks, homes and other assets becomes: “Sell to whom?”
Robert Arnott, who heads money manager Research Affiliates in Newport Beach, sees the economies and markets of the developed world facing what he calls a “3D hurricane” — high levels of debt, huge government deficits and aging demographics.
“We are right squarely in the central part of 3D now,” he said.
He believes that will mean weak economic growth and “uninspired returns” on U.S. stocks, at best, this decade. And in the 2020s, assuming that boomer selling accelerates, Arnott predicts “the impact will be starkly negative on stocks.”
Yet as overwhelming as the age wave may appear, its effects are far from certain.
In any given period, stocks can take their cue much more from short-term fundamentals than from longer-term concerns that are hard to quantify.
Equity markets zoomed in the first quarter on rising hopes for the global economy, driving most categories of stock mutual funds up more than 10% — and key market indexes to nearly four-year highs.
What’s more, though the graying of the boomers is inevitable, the decisions they will make about their money along the way may not match popular conjecture, many experts caution.
The demographic shift “is a potentially big head wind for markets, but it’s difficult to calculate the impact,” said Russ Kinnel, head of mutual fund research at investment advisory firmMorningstar Inc.in Chicago.
There is a long list of variables that affect prices of stocks and other investments over time, and predicting any one of them is difficult enough, let alone nailing all of them and how they will interact.
How fast will corporate earnings grow in the next 20 years? What will the inflation rate be? What will happen with interest rates? Will taxes rise?
By the numbers we already know, of course, older Americans have substantial assets that will either be liquidated or left for heirs. People 65 and older had a median net worth of $170,494 in 2009, according to a study by the Pew Research Center.
Median means half the people had more than that amount and half had less. Measured in 2010 dollars, the 65-and-older group’s median net worth was up 42% from 1984.
By contrast, the 35-to-44 age group had a median net worth of just $39,601 in 2009. And measured in 2010 dollars, the median was down 44% from 1984, Pew found — an indication that younger people are lagging well behind older people in accumulating wealth.
Squeezed by high debt levels and stagnant incomes, many younger Americans are struggling to save and invest.
If older people were to rush to unload their riskiest assets, particularly stocks, younger people might have neither the appetite nor the wherewithal to step up as buyers in significant force.
But history shows that households with substantial assets don’t hit a switch at retirement age and suddenly sell all of their stocks, said James Poterba, an MIT economics professor who has studied aging-investor trends.
“What you see is a very gradual drawdown of assets,” Poterba said.
That has been the strategy of Harvey Labko, who retired in 2006. The 74-year-old Seal Beach resident said he has been taking only the minimum required payouts from his retirement assets, which he estimates still are about 60% in stocks.
“I’ve been able to have a decent quality of life” while limiting asset withdrawals, Labko said. At the same time, he has more peace of mind about his financial future. “You don’t want to outlive your money,” he said.
Longer life spans make it critical to think about portfolio longevity, financial advisors say. The average 65-year-old can expect to live an additional 18.6 years, government data show.
Research by mutual fund giant Vanguard Group also supports the idea that retired investors try to hang on to their assets for as long as they can, said John Ameriks, who heads Vanguard’s investment counseling group in Valley Forge, Pa.
“Not many people upon retirement are going to do something radical with their assets,” Ameriks said. The desire to hold off liquidation “is a safety issue,” he said. “Retirees think, ‘If something comes along and I need a lot of money, I want to make sure it’s there.’”
The “something” often means a large healthcare expense.
To be sure, many older investors seek to reduce the overall risk of portfolio loss as they near retirement. Typically that means shifting their holdings more toward bonds and away from stocks.
That process accelerated in the wake of the 2008-'09 market crash. In 2008, 4.9% of investors 65 and older abandoned stocks entirely within 401(k) accounts surveyed by Vanguard, the company said. That was almost twice the abandonment rate of investors ages 45 to 54.
The flow of money toward bonds has remained massive since 2008. All told in 2009, 2010 and 2011, bond mutual funds took in a net $745 billion, while stock funds had a net outflow of $167 billion, industry data show.
Yet even with stock funds facing net redemptions, major U.S. equity indexes have doubled from their bear-market lows reached in March 2009. Likewise, mutual fund redemptions didn’t hold back stocks in the first quarter of this year, as other buyers, such as hedge funds, moved in.
Individual investors’ relative risk aversion since 2008 leads some market pros to wonder if even some older people will decide they now have too little money in the stock market rather than too much.
Keith Wirtz, who oversees $15 billion at Fifth Third Asset Management in Cincinnati, said investors who have loaded up with low-yielding, fixed-rate bonds may not understand their vulnerability to higher inflation over time.
Rising cash dividends on stocks at least offer some measure of inflation protection, Wirtz said.
“The phrase ‘purchasing power’ has evaporated from our lexicon,” he said. “I think it’s going to come back.”
Maintaining purchasing power has been a motivating force for Cora V. Combs, a 61-year-old 3M Co. scientist who lives in Castaic. Combs, who plans to retire at 66, said her 401(k) savings plan is heavily invested in stocks, and she expects to keep it that way.
With high-quality bonds paying so little, “I probably will defy the rule to go mostly to bonds upon retirement,” Combs said.
Even if boomers’ sales of stocks accelerate, a wild card is future foreign demand for U.S. shares. Rising incomes and wealth in China, India, Brazil and other emerging markets could provide a growing source of demand for American stocks and other securities, especially if they seem relatively cheap.
That demand, however, could be offset by sales by foreign investors in Europe and Japan, both of which face aging demographics more severe than what the U.S. faces.
It’s tempting to assume that demographics must be destiny. Yet it’s worth remembering that there is no road map to consult on boomers’ ultimate effect on markets, because human society has never been at this point before — this level of financial wealth, this number of people and, in particular, these expected life spans.
We know that aging boomers’ assets will eventually be sold or inherited. “It’s a certainty, because mortality is a certainty,” said Rolf Pendall, who has studied demographic trends at the Urban Institute in Washington.
But what that will mean for financial markets, and when, remains a huge guessing game.