"Why baby boomers won't bust the market"

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gkaplan
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"Why baby boomers won't bust the market"

Post by gkaplan »

To hear the alarmists talk about it, you'd think the baby boomers are going to wreck the stock market when they retire. The reality, from Vanguard's perspective, will probably be much less dramatic.

For years, financial pundits have warned that the baby boom generation—the 75 million or so* Americans born between 1946 and 1964—would create a major drag on the stock market as they move into retirement. The oldest boomers turned 65 in 2011, and the AARP estimates that around 8,000 of them are reaching that age every day. And just as the boomers' retirement savings helped drive up equity returns in the 1990s, the concern is that withdrawals from their IRAs and their 401(k)s will cause a steady drain on stocks in the near future. After all, money invested by baby boomers added up to almost 47% of all equity assets counted in a 2010 survey by the Federal Reserve System....
https://personal.vanguard.com/us/insigh ... ent-112013
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Wagnerjb
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Re: "Why baby boomers won't bust the market"

Post by Wagnerjb »

For years, financial pundits have warned that the baby boom generation—the 75 million or so* Americans born between 1946 and 1964—would create a major drag on the stock market as they move into retirement. The oldest boomers turned 65 in 2011, and the AARP estimates that around 8,000 of them are reaching that age every day. And just as the boomers' retirement savings helped drive up equity returns in the 1990s, the concern is that withdrawals from their IRAs and their 401(k)s will cause a steady drain on stocks in the near future.
So, the boomers drove up the equity returns in the 1990's? Wouldn't you think that the boomers would have driven the equity returns in the 2000's to even higher levels?

I do not intend to waste any time trying to guess future equity returns.

Best wishes.
Andy
john94549
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Re: "Why baby boomers won't bust the market"

Post by john94549 »

The question is not whether we boomers will begin to withdraw. Yes, we will. The interesting question is "how" we will withdraw. I doubt this can be predicted with any accuracy. One would need to ask: from where will boomers withdraw, under what circumstances, and in what volume. For example, "bucket" devotees might harvest CDs in a market swoon. Boomers taking a level-AA approach might not, and harvest "across-the-board". Foreign investors, seeking bargains, might well step in to take up the slack in equities. The Vanguard paper alludes to these issues.

Bottom line: boomers who have reduced equity allocations as part of the aging process, either directly or through target funds, will probably feel little impact. Indeed, the very fact that many boomers have already reduced their equity allocations, as a result of the aging process, and will continue to do so "gradually", will dampen any purported "swoon".

Kudos to Vanguard for this article.
Last edited by john94549 on Wed Nov 13, 2013 7:52 pm, edited 1 time in total.
columbia
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Re: "Why baby boomers won't bust the market"

Post by columbia »

I'm 45 and perhaps welcome a swoon and greater purchasing power for equities.
So I don't see a problem, if it were true.
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Dutch
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Re: "Why baby boomers won't bust the market"

Post by Dutch »

I'm questioning the assumption that boomers hold a lot of equity.

Present company excluded of course.
john94549
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Re: "Why baby boomers won't bust the market"

Post by john94549 »

Dutch wrote:I'm questioning the assumption that boomers hold a lot of equity.
This part is probably an open issue. Even including 401Ks and IRAs, I suspect the aggregate data is fairly opaque. The IRS gets a report each year from each of my IRA accounts. I assume they receive a similar report from my wife's 401K accounts. Now, whether the report breaks it down into stocks, bonds, or whatever, I would doubt that*. As to after-tax accounts, all the IRS sees is the cap gains and/or dividend**, not the mix.

I would agree with questioning the assumption that boomers currently hold "a lot" of equity, whatever that might mean.

*For example, is my IRA with Schwab, or USAA, or whatever, an IRA CD or a basket of stocks, bond funds, or whatever.

**For example, once a year, the IRS sees my capital gains in UNSCX. Are they able to extrapolate from that data the worth of the holding, its mix, or its holdings?
Last edited by john94549 on Wed Nov 13, 2013 8:50 pm, edited 1 time in total.
mac808
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Re: "Why baby boomers won't bust the market"

Post by mac808 »

From what I've read a small % of boomers own a large % of the stock market, and those folks don't need the principal to live on, so the impact should be muted.

More interesting to me is the boomer effect on housing prices, because there's a much more even distribution of houses to boomers. As the wave starts to hit a decade after retirement, what happens then?
john94549
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Re: "Why baby boomers won't bust the market"

Post by john94549 »

mac808 wrote:
More interesting to me is the boomer effect on housing prices, because there's a much more even distribution of houses to boomers. As the wave starts to hit a decade after retirement, what happens then?
I suspect it depends on location, as most realtors would say. Should one have a house in an area where boomers are dying and young folks are moving out as well, then I'd say that's an issue. Should one have a house where young prospective buyers are out-numbering boomers willing to sell, it's different.
placeholder
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Re: "Why baby boomers won't bust the market"

Post by placeholder »

columbia wrote:I'm 45 and perhaps welcome a swoon and greater purchasing power for equities.
You're used to the market recovering fairly quickly as it has in the boomer-driven bull markets. What if it swoons and doesn't come back?
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in_reality
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Re: "Why baby boomers won't bust the market"

Post by in_reality »

According to their data when excluding the top 5%, boomers hold about 11% of equities (1). So what really? I'd guess 30% of that will surely continue to be held and maybe more.


(1) 47%x23%=<11% held by 95% of boomers
* As noted above, in 2010 baby boomers held almost 47% of all equity assets counted in a Federal Reserve study.
* The top 5% (in terms of net worth) own 77% of all equities owned by the entire boomer generation
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momar
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Re: "Why baby boomers won't bust the market"

Post by momar »

So the boomers take their savings out of the market to spend it. Prices drop, but profits go up. I'll just make up any drop in prices with increased dividends.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
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bottlecap
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Re: "Why baby boomers won't bust the market"

Post by bottlecap »

These theories become popular because they sound plausible, despite not being based on any truth. It is the inverse of the "saving is bad for the economy" argument. If that were true, all of these investments the boomers made (the spending of which is, of course, now threatening the economy) would prevented all the economic growth we've had over the last 45 years.

This is a good reminder to ignore the noise.

JT
enc0re
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Re: "Why baby boomers won't bust the market"

Post by enc0re »

Would lots of Boomers selling equities lower the value of those businesses? No. So who cares.

'Worst case scenario,' I get a better deal buying my share of ownership.
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3CT_Paddler
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Re: "Why baby boomers won't bust the market"

Post by 3CT_Paddler »

I always find these pyramid graphs to be interesting...

Image

As far as what it means for investors, it's difficult to say.
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