Boomtown
Created by EQUITIES Magazine
Contrary to the Age Wave Theory, globalization and the distribution of wealth will prevent the retirement of baby boomers from draining public markets.
There has been more discussion recently about the Age Wave Theory than ever before. Popularized by economist Harry Dent, this theory posits that U.S. and European markets will peak between 2008 and 2012 after consumer spending from the baby boomer generation reaches its zenith. This could cause unprecedented spikes in unemployment, a severe decline in the markets, and a slowdown in the real estate sector.
Baby boomers—those born between 1946 and 1964 when birth rates spiked around the world—currently represent about 20% of the American public and thus have a significant impact on the economy due to their spending. According to Age Wave, their retirement and slowdown in spending will cause a precipitous drop in the stock market and economy, much in same way their birth stimulated a rise in consumer goods during the post-war economy.
While this seems logical and expected, there are some commonly overlooked factors that dispute this theory. I believe that the retirement of baby boomers is unlikely to cause any significant impact or decline in the stock market or its potential returns. This can be seen by looking at consumer spending habits in retirement, the distribution of wealth among baby boomers, the ways current retirees spend down their assets, and the globalization of markets.
A Study in Assets
A study conducted by the U.S. Government Accountability Office examined financial information from the Survey of Consumer Finances to determine what assets are held by baby boomers, as well as how current retirees spend them down. It’s estimated that the baby boomers control roughly $7.6 trillion in assets invested in stocks, bonds, mutual funds, IRAs, and other retirement accounts.
While examining the data available, it became known that about two-thirds of all the financial assets are held by 10% of the baby boomer generation. In addition to that, about 33% of the boomers do not own any assets in stocks, bonds, or mutual funds, as shown in Figure 3.
It should also be noticed that distribution of wealth among baby boomers is severely slanted toward the top the 25%. The top 25% of baby boomers control almost 90% of the retirement assets. The top 5% control over half of the assets as well.
The retirees who are most likely to spend down assets to maintain their standard of living control such a small portion of the total assets that their liquidating of positions and accounts will have an unnoticeable effect on the markets. Three percent of the $7.6 trillion in assets held by the baby boomers is $228 billion. With all the recent Fed injections into money markets and bailouts totaling well over $4 trillion, the effect of a mass liquidation of holdings by these 3% would be inconsequential.
Also, mass liquidation is unlikely because retiree habits show that assets, if spent down, are done so gradually over retirement. Even at a constant rate of 5% a year ($11.9 billion), the effects on the market would be minimal.
The wealthiest boomers are the ones driving the economies. The individuals with little to no investable assets will not influence the economy like the wealthy. A large purchase such as a Yacht, a second house, or a private jet can easily do more for the economy than the sum of all the purchases by an individual without any savings.
With such a large concentration of the assets held by the wealthy individuals who—based on the study of current retiree behavior—will not need to spend down their assets to maintain their lifestyle often end up accumulating more assets over their retirement rather than dwindling them down.
Another important thing to note is that a large number of the boomers who do own financial assets are more likely to bequeath them to their heirs than spend them down. Also, many boomers will hold stock long into retirement as an inflation hedge and to counter their fears of outliving their savings.
Spending Habits
In addition to the wealthiest 10% of the baby boomers controlling a large majority of the assets, it’s believed that their behavior will mimic previous generations’ retirement habits, where a majority of the retirees continued to accumulate financial assets during their retirement. Plus, there is a 19-year period during which baby boomers will enter retirement. This should further reduce their abilities to hasten a sharp decline in the markets.
It was also found that a majority of baby boomers do not plan to retire at the standard age. Over half the baby boomers surveyed by the CFC said they plan to leave full time employment around age 65. More than 60% expressed an interest in getting a part time job during retirement, which helps to reduce or delay the amount of investment assets they need to sell to maintain their lifestyle. The current economic downturn will only increase these events.
A study conducted by James Poterba in 2004, “The Impact of Population Aging on Financial Markets” published by the National Bureau of Economic Research, found that “holdings of elderly households suggests there is a limited decline in financial assets as households age.”
In relation to the size of the U.S. economy, baby boomers represent a small part, just 20%. They hold 14% of all stocks and 6% of all bonds, as shown in Figure 4. Let’s keep in mind that of all baby boomers, roughly 5% to 10% will have to liquidate positions to maintain their lifestyle. At an average retirement of over 20 years, a slow gradual sell off should be expected, which won’t impact the financial markets significantly.
A common argument for the mass liquidation of their equity positions is that upon entering retirement, baby boomers will have a much lower risk tolerance for market volatility then before. In the Survey of Consumer Finances findings, out of the total wealth of households with people over 70 years of age, more of their savings is still invested in stocks than bonds.
Going Global
Globalization of the markets and increasing demand from developing countries will also offset the baby boomer retirement issues. A statistical analysis conducted by the GOA showed that between 1948 and 2004, macroeconomic and financial factors such as industrial production and dividends from stock have been responsible for more of the variation in stock returns than any demographics or shifts in the population’s age structure ever have.
More importantly, we have to look at the bigger picture. No longer can we just think domestically about the markets. The economy is now a global one and it must be looked at it as so. Even 77 million baby boomers become insignificant in the big picture. With the total U.S. population accounts for approximately 5% of the world population, the baby boomers’ power is lost and has been shifted to the new generation influencing the global economies.
With the standard of living rising across the world and developing nations building infrastructure, there is something much bigger happening: the interboomers. Across the world, billions of people are having their second meal for the first time.
When your standard of living begins to increase like this, you cannot go back to the old ways. You find a way to continue that path of improvement, regardless of what it takes. The result? Growth. The amount of growth taking place across the world is more than enough to offset any effect the baby boomers could have on the domestic or global economy. We are no longer just domestic investors. The world is our market, and new powerhouses are coming up.
Since 1985, the U.S. GDP as a percentage of the world’s GDP increased by 30%, while developing countries such as China have increased over 1,000%. China has gone from having 1% of the world’s GDP to over 10%. India and Russia have more than doubled as well. These developed countries are housing billions of people who are just starting to taste what we’ve become accustomed to.
European and Asian nations have also had more time to compound their money and grow their assets. The U.S. has only been around a few hundred years, while Europe and China have been around for thousands. This has allowed for old money to continue growing for centuries.
The interboomer generation is larger than anything we’ve seen before. Consisting of billions of people, this will be the driving force of the market and economies in the future. The effect that the baby boomers had on the economy and on the retirement will be minimal compared to the global effect the interboomers are having right now.
Coinciding with the development of these countries is the development of the people living there. Never have more people been educated than today. Interboomers are creating innovations in every field to better their lives. This in turn will result in higher employment, increased GDP across the board, and wealthier people as well. The increase in consumption will be dramatic and noticeable across the world as more people line up to live the American dream that we live.
There are thousands of future billionaires across the world. Whether they make their money by curing cancer or inventing a more effect solar cell, new people will rise to the top, and new money will be acquired. GDPs will continue to increase long term as the countries become more and more developed, and the citizens continue to educate and improve their lives and our lives as well.
By Jason Nolan
Writer''s Bio
Jason Nolan is the director of operations at Magnet Investment Group. You can contact him for more information at Jason@magnetinvesting.com, or by visiting www.magnetinvesting.com.
