Boomer Caused Market Collapse
by Gary Foreman
Will Boomers Have Enough to Retire?
Retiring on Social Security
I recently read a book called What If Boomers Can't Retire? How to Build Real Security, Not Phantom Wealth. The main concept is that about half of all baby boomers have retirement investments in stocks - IRA's, 401k's, mutual funds, etc. When boomers start retiring, those stocks will all start selling. Thousands and thousands of people selling stocks. Who will buy them all? There will be less working wage earners per retiree each decade, so they won't be buying as many shares. I would be interested in your thoughts on this.
Larry's concern is based on a basic rule of economics. If there are more sellers than buyers, prices go down. And, it is a fact that baby boomers will begin to take cash out of their retirement plans. But does that doom the stock market?
Let's begin with some numbers. There were 77 million baby boomers born between 1947 and 1964. Or an average of 4.3 million per year. From 1965 to 1999, there were 140 million babies born. An average of 4 million per year. Not that big a drop.
Next, remember that everyone won't sell at once. There's an 18-year span between the first and last boomers. The first ones will be starting retirement while the last ones are still in their peak earning (and investing) years.
Baby boomers will live longer than their parents. Many don't plan on retiring at 65 and playing golf for 20 years. Some recent studies show that over half of boomers expect to work some during retirement. So they won't rely entirely on selling stocks to pay the bills.
The tax laws also discourage stock sales. Many retirement accounts trigger taxes only when money is withdrawn. So boomers will delay selling as long as possible.
The bottom line is that boomers will reduce their retirement savings at a slower rate that past generations. So the effect that concerns Larry will be diluted and happen over a long time. In fact, some retirement accounts will go to the boomers' heirs without ever being sold.
Next, let's look at boomers retirement savings. They haven't invested everything in stocks. They have a mix that includes stocks, bonds, CD's, annuities and even their homes.
That balance will gradually shift as they get older. If they're like previous generations, they'll slowly begin to sell stocks and their family size homes and put more of their savings in bonds and CD's for the income and safety. The shift will begin gradually before the first boomers even get to retirement. Some of the older boomers have already begun the process.
The same free market that is the cause of Larry's concern also provides a solution. If stock prices fall fewer companies will offer new stock. So the supply of stock will shrink relative to the number of people. In fact, if stock prices fall below a certain level companies will begin to buy back their own shares. That will cause share prices to rise.
Remember, too, that the U.S. stock markets are actually worldwide markets. And boomers aren't the only ones that tend to move as a group. Foreign investors are often either big buyers or sellers for a year or two. So far they haven't caused a market collapse.
The long-term trend of the stock market is much more closely tied to the health and size of the entire economy. The U.S. Census Bureau expects the domestic population to grow from 275 to 400 million in the next 50 years. So it's not unreasonable to expect the economy to keep growing.
What should Larry do if he's a boomer thinking of retirement? His best strategy is to own a variety of assets. No retirement plan should be limited to stocks or any single investment type. Larry will be much safer if he owns a mix of stocks, bonds, real estate and CD's. The unforeseen events that will cause one type to go down will at the same time cause another type to go up.
I would caution Larry not to count on Social Security to cover all his monthly expenses. Today there are three workers for every retiree. That will drop to two to one during the boomer retirement years. Current benefits cannot be maintained unless changes are made. Those changes are limited to benefit reductions for boomers, major tax increases for younger workers or a partial privatization of the plan. This is a hot political issue, but boomers will need to supplement Social Security if they want a comfortable retirement.
A much bigger question for boomers will be did they accumulate enough savings before retirement. Using almost any measure, a large number of them aren't saving nearly enough to support their current lifestyles. Hopefully Larry won't be among them.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
Take the Next Step:
- Are you getting the best CD rate? Use our simple CD tool to find out. It's completely private, easy to use and you'll know what rate is available to you in seconds!
- Get the interest you deserve! Compare money market rates with our best rate finder. It only takes a minute and your privacy is completely protected.
Share your thoughts about this article with the editor.
Debt from my past is preventing me from saving for my future! Tell us: Yes, debt is hindering my ability to save and I could use help dealing with it! or No, debt is not a problem but I am trying to get ahead financially!
More Money Tips & Tools
- 10 places to look for $500 in savings
- 9 savvy strategies to save for a rainy-day fund
- 5 big bills you can cut fast
- Money-saving secrets of the rich and frugal
- The Rule of 72...or how to easily double your debt
- Could paying for kids' college hurt your retirement?
- How not to fall short for retirement
- This week's Readers' Tips