Current Thinking

Is there a Baby Boomer Retirement Effect on the Stock Market?

A blog by Frederic P. Slade, CFA, Director of Investments

As the first wave of baby boomers (those born between 1946 and 1950) attain “normal” retirement at age 65, an important question has been raised: will all these present and future boomer retirees depress the stock market as they cash in their savings? After all, boomers (i.e. those aged 46-64) have been estimated to own nearly 50% of the U.S equity market.

Recent studies by Vanguard1 and others have cast doubt on the theory that boomer retirements will depress the equity markets. Among the factors cited are:

  • The retirement ages and retirement years of the baby boomer population will be spread out over time. This will tend to smooth out the buy and sell decisions of this group.
  • Low interest rates will provide an incentive for retirees to diversify further into stocks.
  • Even if US retiree holdings of stocks decline, foreign ownership of US equities, which has increased from 7.2% in 1990 to 20.6% in 2012, will help compensate for this decline.
  • The wealthier tend to save more. Vanguard estimates that the top 20% of boomers in net worth own 96% of the equities owned by the entire baby boomer population. This high net worth group generally does not need to sell stock to meet their short-term spending needs. Also, they tend to accumulate assets for their estates.
  • Longer expected life spans, resulting in increased cost of living, will create additional demand for equity investments to keep up with inflation.

What could cause boomer retirements to have a negative effect on the stock market?

  • In the case of a global recession, foreign demand for US equities may decline as these investors become risk averse and sell their US holdings. In this instance, foreign ownership may not make up for a decline in U.S. retiree holdings.
  • A meaningful increase in U.S. interest rates (though not immediately likely) would cause a shift out of stocks into CDs and other fixed income investments.
  • A repeat of the 2008 market decline may cause retirees to become risk averse and shift out of stocks into cash.

In summary, there are many factors that impact the investment behavior of baby boomers in retirement. However, fears of a demographics-driven decline in the stock market do not appear warranted at present. Nevertheless, it remains to be seen how things will play out as future waves of retirees impact the financial markets.

1. 1. Wallick, Daniel W., Shanahan, Julieann and Christos Tasopoulos. “Baby Boomers and Equity Returns: Will a Boom in Retirees Lead to a Bust in Equity Returns?” Vanguard paper, October 2013.

NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.

 

About the Author

Frederic Slade

Frederic Slade is Assistant Vice President and Senior Director, Investments at Pentegra Retirement Services. He joined Pentegra in May 2007 as a Senior Analyst in the Investment Department and became Director-Investments in January 2013. He is responsible for managing over $1 billion in internal bond portfolios and providing asset/liability studies, analytics and product strategy for Pentegra’s Defined Benefit and Defined Contribution Plans. Mr. Slade is also a frequent contributor of economic and financial market blogs to Pentegra’s Talk to a Specialist website and the financial media. Prior to joining Pentegra, Mr. Slade was a Senior Quantitative Analyst at Citigroup Asset Management, providing asset allocation and quantitative stock screening for mutual fund products. Prior to Mr. Slade’s tenure at Citigroup, he was an Investment Manager at NYNEX Asset Management (now Verizon). At Verizon, Mr. Slade was responsible for asset allocation and planning for its $15 billion Defined Benefit pension fund. Mr. Slade holds a Ph.D. in Economics from the University of Pennsylvania and a CFA, and is a frequent presenter at industry seminars and conferences.




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