Boomer Retiree Wave Won't Crash The Market


A newly released Vanguard Mutual Fund Group research paper offers numerous reasons why investors should not agonize that the wave of baby boomers retiring will bring down equity returns as they retire. 


The concern has been 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 assumption is wrong, and a 2006 study by the Government Accountability Office showed that demographic variables (i.e., the effects of aging boomers), account for less than 6% of stock market return variability. 


The first critical fault with this assumption is that boomers, though retiring at a rate of 8,000 a day, are not all retiring at the same time. In fact industry statistics show that investors typically wait till age 70.5 before taking IRA withdrawals to comply with required minimum distribution rules. 


Another factor militating against a boomer-forced market crash is that upon retirement, retirees are not instantly or methodically selling stocks and moving into bonds or other income-oriented investments. Vanguard cites that the top 20% of boomers owns 96% of all equities, so there does not appear to be a wave of stock selling for the over-65 set. 


“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. 


Finally, 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 then 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 


Current Events 

  • Federal Reserve Chairman Ben Bernanke said yesterday that short-term interest rates may stay near zero "well after" the jobless rate falls below 6.5%, the latest effort by the central bank to assure markets that rates will remain low even as it contemplates pulling back on its $85 billion-a-month bond-buying program. 

    In a copy of remarks, Mr. Bernanke said that "even after unemployment drops below 6.5%, the [Fed] can be patient in seeking assurance that the labor market is sufficiently strong before considering any increase in its target for the federal funds rate."

    Also, Mr. Bernanke's successor, Janet Yellen, has stated that she believes the Fed needs to continue steps to keep interest rates down. 

  • Gasoline prices have dropped substantially, and the cost savings is just in time for the holidays. Who knows if consumers will apply their savings to Christmas and Holiday gifts or pay down debt, save or invest with it. 

  • At two conferences earlier this month, executives from some of the country's largest financial firms (i.e., Bank of America, Goldman Sachs, Citigroup, etc.) noted that they are seeing positive signs for their institutions as the economy improves. 

  • Lower energy costs and competitive wage rates are beginning to bring manufacturing business back to the U.S. The transition of these new jobs is a gradual process, but a positive sign for the U.S. employment picture and economy. 


Basically, the Fed Reserve's low interest rate policy has been the biggest reason for the current stock market run up. However, I have listed other positives above. As such, enthusiasm has grown for stocks, while some investors are still skeptical. Thus, further gains may lie ahead, but it would be nice to see Mr. Market take a short break. Honestly, you would think after his impressive upward climb over the last year or so he would be ready for a breather. Thus far, it appears he may have gotten a second wind, but at some point he's going to need to stop and rest, and that is what many of these skeptics are waiting for before they put their dollars to work. 



"If you don't want anyone to know, don't do it."

                             Chinese Proverb

"What happens to a man is less significant than what happens within him. "

                             Louis L. Mann  


Tony Moeller, CPA 


The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.  

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