Income planners need not fear that the wave of boomers getting ready to retire will create a market sell-off that will upend income plans, several financial advisors predict.
The number of retirees is on the rise. In 2006, 34 million retired Americans received Social Security benefits, compared with 17 million in 1970, according to data from the Social Security Administration. And that number is anticipated to grow between 2010 and 2030, as boomers reach retirement age, according to the SSA.
In fact, the SSA says it is anticipated that more than 40% of its own workforce will retire by 2014.
But in spite of these daunting statistics, financial advisors say there are 2 major reasons that boomers will not create a tsunami of sell-offs. They are, first, the increasingly global investment markets that influence the performance of securities and, second, the greater life spans that will necessitate creating income over longer periods of time.
Even as boomers age, they will continue to want to be diversified in their investments, and that will include maintaining investments in securities, says Matthew Gelfand, a financial advisor and president of MDG Financial Advisors, Bethesda, Md.
Other investors, he continues, are not retiring or planning to retire. And there will be younger investors both domestically and abroad who will help maintain the demand for securities, Gelfand adds.
In China, for example, 2006 census estimates cited by Wikipedia indicated that 20.8% of the population is age 14 or younger, 71.4% is between age 15 and 64, and the remainder is aged 65 or older. The average age is 32.7.
When baby boomers entered the workforce, Gelfand says, there was no discernible evidence that they changed the financial markets, and there is no discernible evidence that they will impact the markets as they leave it, he adds.
How boomers make withdrawals will determine the impact on the markets, according to Anthony Benante, a financial advisor with Baron Financial Group, SouthFair Lawn, N.J. “The money will not evaporate; it will be used to consume, save, invest in other asset choices, be given to relatives and/or donated to charities.”
“I don’t think it will cause the dreaded drop in the market many are expecting. Boomers are going to be making their withdrawals over a 20-, 30-, and 40-year time horizon,” says George Middleton, a financial advisor with Limoges Investment Management, Vancouver, Wash. Additionally, according to Middleton, many boomers do not want to see their account balances drop and only want to live on earnings. And, he concludes, many will continue to work.
Hypothetically, “if all the boomers cashed out their 401(k)s, IRAs, etc. at the same time and moved them into CDs, then I suppose there might be a short-term problem. But I doubt that would happen,” says Jeremy Portnoff, a financial advisor with Portnoff Financial, Piscataway, N.J.
Ultimately, he continues, the outflow of money from boomers will be offset by increasing inflows from younger investors. Outflows, Portnoff adds, will also happen over a long enough period of time so that there will not be a negative effect on the markets.
That realization of the need to withdraw money over a longer period of time will also slow down boomers’ desire to move out of securities markets, Portnoff says.
Matt Mikula, a financial advisor with Balasa Dinverno & Foltz, Itasca, Ill., also says he believes the need to make sure their money lasts will spur retirees to keep a portion of their portfolios in stocks. Retirement can stretch 20 and even 30 years, Mikula notes.
And that need may be even greater if there is a drop in the market during the withdrawal phase, particularly at the start of the withdrawal phase, he says. “It can have a huge effect on whether or not a client will be able to meet their goals,” Mikula says.
But investors adjust to changes in the markets, he says, adding that his firm has found they spend more during bull markets and less during bear markets. For instance, he says, investors may delay purchase of a car until there is a market rebound rather than selling assets to raise cash when the market is down.