Some authors and pundits believe that the retirement of Baby Boomers from the workforce will have dire consequences on the stock market since they will be selling, not buying. How worried should you be?
Over the past few years, you may have heard or read the opinion that retiring Baby Boomers, as they start to withdraw savings, will “crash” the stock market. Not surprising because, at first glance, it seems to make sense. With about 75 million Americans between the ages of 46-64* retiring, how could this not have a negative impact? However, the logic of this argument falls apart if you dig a little deeper.
As Vanguard concluded in a study released last month, this is not likely to happen for three main reasons:
- They all do not retire at once. The oldest boomers turned 65 in 2011, and their numbers are widely distributed through the years. Any reduction in stock holding would happen very gradually, and there are plenty of people in their prime earning years who are buying into the market at the same time!
- They all do not have the same amount of wealth. Vanguard found that the top 5% (in terms of net worth) of Boomers hold 77% of the equities that this demographic owns. With that wealth, the top 5% are less likely to sell stock in order to maintain a standard of living…those equities could be used for estate planning, charitable giving, or other purposes. Those who are selling equities for income own less than a quarter of the Boomer equity.
- Americans are not the only ones in the U.S. stock market. Foreign ownership of U.S. equities has doubled (10.2% to 20.6%) from 2000 to 2012. Many people in other countries, with their increasing wealth, see the U.S. market as safer than many other markets. This is not a bad thing. This ownership provides money to U.S. companies, and can help counterbalance the equity sales of retirees.The factors that move the stock market higher and lower are complicated, and anyone who tries to convince you they have it all figured out is delusional. The best thing to do is to have a properly diversified portfolio (including ownership of stock, bonds, and real estate outside our borders) and work with a financial adviser who can help you sort out these types of flawed ideas.
Who do you know that might be worried about a stock market crash from retiring Boomers? Be sure to share this with them!
* Source: Social Security Administration.
Wow the top 5% of baby boomers control 77% of the equities. That is an amazing statistic. Where did you find that one Elliott?
I know – that statistic was surprising to me as well! It’s from the Vanguard report that I linked to, page 5. The top 20% of boomers own 96% too!
Another reason why their withdrawal will not be disastrous, and may in fact help the market – when they take the money out, what are they doing with it? Not sticking it in a mattress! They are SPENDING it, and that money, once freed from captivity, will help propel the economy forward, driving up value because the business are actually more valuable because they are making more money, not because the stock is all owned. If only the investments were better distributed…
Absolutely, Jim. I’ve told clients before that, unless the boomers are withdrawing money to set on fire for warmth, they will be spending it on goods and services that benefit companies in their portfolios!