The idea that the baby boomers — who began retiring in droves in 2011 — will eventually crash the stock market has been going around for years. But will it actually happen?
Cathy Pareto, president of Cathy Pareto & Associates, a wealth management firm in Miami, Fla., believes the idea is farfetched because people who retire don’t just yank all of their assets out of the market at once. They gradually shift their retirement assets from higher risk equities to lower risk bonds and stable value funds as they age, she said.
“You don’t plan for retirement the day before or the day after you retire,” she said. “Most have moved out of the stock market and already are invested in bonds, so the premise of this idea that all of these people are moving out of the stock market at once is flawed. They can’t afford to do that.”
Another reason Pareto doesn’t believe the boomers will crash the market is that Treasury bond yields are very depressed. The current yield is less than 2 percent, “so retirees can’t afford to live on those types of yields,” Pareto said. “If you look at the S&P 500, the dividend is just above 2 percent. Granted, you take a different kind of risk to get that kind of income, but retirees would be hard pressed to make any reasonable money in just bonds in this environment.”
The baby boomer generation encompasses 78 million people who were born between 1946 and 1964, according to the Congressional Budget Office in its report, “Will the Demand for Assets Fall When the Baby boomers Retire?”
“Some economists warn that if the baby-boom generation begins to sell off assets to finance retirement, there could be a steep decline in the demand for assets, particularly stocks,” the 2009 report found.
Some economists concluded that the increase in baby boomers’ demand for assets during their high-saving years is what caused the stock market to be so strong over the past two decades.
“In principle, if such an unusually large cohort were to sell its accumulated assets to finance consumption during retirement, the total demand for assets in the economy could fall substantially over several decades and the prices of those assets could decline as well,” according to the CBO. “However, empirical evidence about the behavior of earlier groups of retirees suggests that baby boomers will not sell their accumulated assets quickly after they retire.”
Evidence from past groups of retirees shows that most people don’t substantially change the composition of their asset portfolios upon retirement, the report found.
The recession has caused many people to defer their retirement to a later date, which would reduce the amount of assets they would need to sell off to finance their retirement lifestyle. “The aggregate effect on asset demand might be small, however, if people delayed retiring for only a year or two,” the report found.
The CBO added that foreign demand for U.S. assets should help counterbalance the baby boomer exodus.
The Federal Reserve Bank of San Francisco attempted to tie demographic trends to stock prices in its August 2011 report, “Boomer Retirement: Headwinds for U.S. Equity Markets?”
“Many baby boomers have already diversified their asset portfolios in preparation for retirement,” the report stated. “Still, it is disconcerting that the retirement of the baby boom generation, which has long been expected to place downward pressure on U.S. equity values, is beginning in earnest just as the stock market is recovering from the recent financial crisis, potentially slowing down the pace of that recovery.”