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Baby boomer market bust?

As 70 million people born between 1946 and 1964 begin retiring, the big question is: Will they bail out of stocks and other assets to pay for their golden years?

April 08, 2012|By Tom Petruno, Los Angeles Times
  • Mutual Fund Quarterly
Mutual Fund Quarterly (Jon Krause, For The Times )

For the last 40 years or so, many baby boomers have saved and invested diligently for their retirement.

Now they may face a much different challenge: finding buyers for the mutual funds, individual stocks and other assets they'll need to sell to pay for their golden years.

The demographic bulge of the 70-million-some boomers has driven U.S. economic and market trends in each decade since World War II. They powered the housing market for much of that period, inspired an explosion of brand-name consumer goods and, in the 1980s and '90s, helped stoke the greatest stock bull move of all time.

Today they are an ever-expanding gray shadow on the national landscape: Every 24 hours for the next 19 years, an average of 10,000 boomers will turn 65.

By 2030, the number of Americans 65 and older is expected to reach nearly 72 million. That would be a 78% jump from 2010, according to Census Bureau estimates. By contrast, the age cohort of 45- to 64-year-olds — many of whom presumably will be accumulating significant investments in the next two decades — is expected to rise just 2% to 83 million in the same period.

With that kind of lopsided societal shift underway, the question for the aging would-be sellers of stocks, homes and other assets becomes: "Sell to whom?"

Robert Arnott, who heads money manager Research Affiliates in Newport Beach, sees the economies and markets of the developed world facing what he calls a "3D hurricane" — high levels of debt, huge government deficits and aging demographics.

"We are right squarely in the central part of 3D now," he said.

He believes that will mean weak economic growth and "uninspired returns" on U.S. stocks, at best, this decade. And in the 2020s, assuming that boomer selling accelerates, Arnott predicts "the impact will be starkly negative on stocks."

Yet as overwhelming as the age wave may appear, its effects are far from certain.

In any given period, stocks can take their cue much more from short-term fundamentals than from longer-term concerns that are hard to quantify.

Equity markets zoomed in the first quarter on rising hopes for the global economy, driving most categories of stock mutual funds up more than 10% — and key market indexes to nearly four-year highs.

What's more, though the graying of the boomers is inevitable, the decisions they will make about their money along the way may not match popular conjecture, many experts caution.

The demographic shift "is a potentially big head wind for markets, but it's difficult to calculate the impact," said Russ Kinnel, head of mutual fund research at investment advisory firmMorningstar Chicago.

There is a long list of variables that affect prices of stocks and other investments over time, and predicting any one of them is difficult enough, let alone nailing all of them and how they will interact.

How fast will corporate earnings grow in the next 20 years? What will the inflation rate be? What will happen with interest rates? Will taxes rise?

By the numbers we already know, of course, older Americans have substantial assets that will either be liquidated or left for heirs. People 65 and older had a median net worth of $170,494 in 2009, according to a study by the Pew Research Center.

Median means half the people had more than that amount and half had less. Measured in 2010 dollars, the 65-and-older group's median net worth was up 42% from 1984.

By contrast, the 35-to-44 age group had a median net worth of just $39,601 in 2009. And measured in 2010 dollars, the median was down 44% from 1984, Pew found — an indication that younger people are lagging well behind older people in accumulating wealth.

Squeezed by high debt levels and stagnant incomes, many younger Americans are struggling to save and invest.

If older people were to rush to unload their riskiest assets, particularly stocks, younger people might have neither the appetite nor the wherewithal to step up as buyers in significant force.

But history shows that households with substantial assets don't hit a switch at retirement age and suddenly sell all of their stocks, said James Poterba, an MIT economics professor who has studied aging-investor trends.

"What you see is a very gradual drawdown of assets," Poterba said.

That has been the strategy of Harvey Labko, who retired in 2006. The 74-year-old Seal Beach resident said he has been taking only the minimum required payouts from his retirement assets, which he estimates still are about 60% in stocks.

"I've been able to have a decent quality of life" while limiting asset withdrawals, Labko said. At the same time, he has more peace of mind about his financial future. "You don't want to outlive your money," he said.

Longer life spans make it critical to think about portfolio longevity, financial advisors say. The average 65-year-old can expect to live an additional 18.6 years, government data show.

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