Vanguard: Boomer Retiree Wave Won’t Crash Market

Vanguard study offers multiple reasons why stock market folk wisdom about demographics is not borne out by the research

Traders at the New York Stock Exchange. (Photo: AP) Traders at the New York Stock Exchange. (Photo: AP)

A newly released Vanguard research paper offers a battery of reasons why investors should not heed the oft-stated worry that the demographic bulge of boomers will bring down equity returns as they retire.

The longstanding fear is fueled by a perception that the surge in equity returns — in the 1990s particularly — reflected boomers’ rise to economic prominence, having reached their peak earnings and savings during that period of huge stock market gains.

The flip side of that market folk wisdom is that baby boomers, who began turning 65 in 2011, will now start liquidating their equity holdings on a vast scale, thus forcing a vast stock market crash.

The Vanguard study says this presumption is wrong, and starts by citing a 2006 study by the Government Accountability Office showing that demographic variables, which lie at the heart of this fear, account for less than 6% of stock market return variability.

The first critical fault with this demographic trope is that boomers, though retiring at a rate of 8,000 a day, are not retiring at the same time. Indeed, the baby boom between 1946 and 1964 implies an 18-year span of retirement, thus spreading out the presumed impact of equity sales.

However, Vanguard thinks this period is longer still since industry statistics show that investors typically wait till age 70.5 before taking IRA withdrawals to comply with required minimum distribution rules, thus elongating the relevant time frame by 5.5 years (from age 65).

A second factor militating against a boomer-forced market crash is that pre-retiree equity ownership has hovered near a 48% average, and even as that figure has moved up or down, equity downturns have not ensued as a result of pre-retirees retiring.

Vanguard cites the concentration of assets among a wealthy segment of boomers as a third reason investors should not fear a demographic tsunami. The top 20% of boomers owns 96% of all equities.

“The portfolio goals of these baby boomers may well be oriented toward estate planning and intergenerational wealth transfers,” implying a long-term vision for most equity assets and less turnover that might otherwise be supposed, the Vanguard paper says.

Vanguard also considers the asset allocation of retirees and finds that equities make up a sizable portion (44%) of the retirees’ portfolio, so there does not appear to be a wave of stock selling for the over-65 set.

Finally, the research paper reframes the supply-demand equation that provokes worries of a stock dive as the population ages. U.S. stocks apparently depend less and less on U.S. stock ownership as the foreign demand for equities persistently rises, from $6 billion in net foreign purchases in 1980 to $109 billion in 2012.

"Continued globalization is a reminder that U.S. investors are not the only buyers—thus dampening the hypothetical impact of a domestically driven equity sell-off based on baby boomers retiring,” the research paper states.

Compounding all these findings, Vanguard sees no long-term relationship between U.S. stock returns and the over-65 percentage of the population. The paper than confirms this lack of relationship through a regression analysis of a broader set of 45 developed and emerging economies over various time periods; age and stock returns showed no meaningful link.

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Check out 5 Reasons Clients Make Bad Investing Decisions on ThinkAdvisor.

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