A concerned reader asked me about the stock market and the aging population of baby boomers. Will all these retirees kill stock market performance?
We’ve seen how last year’s market performance had decimated retirement plans, but what is going to happen when they really need that money in the next few years. Should we be anticipating some sort of mass sell-off? And in that case, do you think it’s better to get out of stocks?
I wouldn’t get out of stocks long term. Here are just a few reasons why.
Gradual Withdrawal
There are millions and millions of retirees who will need their money, but instead of a massive sell-off, the withdrawal is spanned over decades. So many people forget that even though we retire in our mid 60s, we still need the money to last for another 25 or maybe even 40 years. As retirees realize this, it is less likely that they will withdraw all their investments from the get go since the time horizon is actually much longer than they originally thought it was.
The need for money will pressure stock prices for sure, but the media probably over exaggerated this.
Look at the Big Picture
Then there’s the question of how much money in the stock market is actually money that people need. I was watching CNBC which cited that the top 1% pays more income taxes than the bottom 90%. I know this statistics is for income and not wealth but wouldn’t you agree that the rich people actually have more money left over to own stocks? If most of the money in the market is money from the rich, does the need to sell for most Americans really affect the stock market that much? Take Bill Gates for example. How much of his shares of Microsoft is “need” money?
What are the Alternatives
We also have to think about the alternatives if we were to take money out of the stock market. We know that eventually, our mattress will run out of space so where else do we put our cash? There are commodities, but I argue that without an appetite for the stock market, commodities won’t do as well as one might think either. CDs? Guaranteed low rates. Inflation adjusted treasuries? This brings me to the next point.
It Will be a Hit on Earnings Though
While most of America’s wealth is controlled by the super rich, the GDP, or economic consumption is not. When many people retire, it will create massive pressure on American’s spending level. More specifically, don’t you notice that people who are retired just spend less money the further they are into retirement? You may see some people travel around the world or live lavishly, but most people live more frugally as they don’t have the income (or the credit) to support it. If demand is down, it will help keep inflationary pressures lower.
This however will hurt American businesses and when earnings suffer, the underlying stock price will as well. What should we do then?
The Global Story
The American consumption may be slowing, but China’s consumption is not slowing down anytime soon. When Japan’s demographics started aging during the past 20 years, the US stock market had the biggest boom in history. If you were a Japanese who invested in the S&P 500 in 1980, you would be so much ahead of most of your friends.
Having the opportunity to live in several countries, it’s interesting to see that the majority of people invest most of their money in markets from the country they reside in. Canadians would invest in the TSE, Americans in the S&P 500, people from Hong Kong the Hang Sang index and so on. It’s not hard to imagine why – they are familiar with the companies, investing in other countries is more expensive, and they feel less in control when the markets are only open when they are asleep.
However, stocks in Canada are stocks. Stocks in the US are stocks and stocks in China are well, stocks! If you are sure that the American population is aging and will create a massive sell-off in the US stock market, then just invest somewhere else that don’t have this problem.
Long term, stocks are still the winner. Keep investing and always think big picture and long term.
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{ 9 comments… read them below or add one }
I think everyone wishes they just got out of the market in June of last year but we will just try to play the cards that are dealt to us I guess. It’s hard to keep being invested but I am and the last 30 or so days has been good. Now if we can only get another 30 or 40% move up in the next 30 days, we’d all be close to what we had!
I think long term, stocks are a great place to be but it would be hard for it to post another huge move like that in the short term. If you are a long term investor, then why not take a break from the day to day and just let it do its thing?
If you are a trader though, you probably should look at the markets more closely and make your own judgment.
I’ve heard this demographic argument before too, and surely some of it is valid. But you bring up some good points here. I definitely would not see it as a reason to get out of the market, and don’t plan to. If anything, it could be an op. to pick up value buys. If there is selling happening, downward pressure on stocks means better pricing for the buyers.
Just hope that the ‘frugal movement’ catches on…. if that happens, then some of those points won’t be as valid.
1. I intend to live off of the interest and dividends from the market – not withdrawing the principal (except in emergency) – so there should be no big escape from my personal stock market.
2. Being frugal, my retirement income will amount to MORE than I am making and living on now – so I will actually have MORE to spend in retirement than I do now – by a lot! Hopefully, if the frugal movement catches on, that will apply to others as well.
3. As part of diversification, I have invested in foreign stocks as well as US.
4. I think, while some businesses may see a slow down, others (more in tune with the aging population) will just boom… that’s the changing demographics and the need to keep your stock portfolio current (and even ahead of) the age of the population.
5. Some of us, in order to help out our grandkids, will be gifting money/ or stocks, to them to spend, rather than spending it ourselves in our final years (and avoiding probate taxes, etc)…. so while you might not see us spending our money lavishly, it will still be being spent, albeit by our grandkids,etc… same money tho.
This is written from a semi-retired perspective, 55, looking at 7 years til full retirement (or less). I think 7 years is enough time for most anyone to straighten out their act, become debt free, and therefore have more discretionary income to spend in retirement. The rest of the babyboomers have time to ‘get it together’ now before retirement
One can hope.
Thanks for putting this up David. It helped to put the issue more in perspective. I suppose you’re right that this isn’t going to be any sort of catastrophic event. I think my focus will be on looking for specific stocks that outperform. I predict that the indices will show less than stellar gains, but they can’t affect every company. Perhaps the star performers will be in industries where the baby boomers are least invested in.
I think it is just a tiny minority of the Baby Boomers that will cause an “issue” by selling and/or withdrawing money from the market. The truth is: most of the baby boomers don’t have savings for the retirement, so the real problem will be the poverty and their lack of retirement income.
Add to this the burden they are going to put on any kind of state pension system (Social Security in US or CPP in Canada) – that’s the real concern for the future.
[shameless self-promotion: I wrote a Report about this and you can download it by going to my website]
Actually most retired investors have diversified portfolio holding anything from domestic stocks to international stocks, bonds ( and domestic fixed income as well).
Do not forget that most of them are advised not to withdraw more than 4% of their portfolio values each year.. With dividend yields close to 4%, i think that most of the withdrawals are going to come from dividends and very few on aggregate would be selling any stocks.
There is a bigger issue here. I have sent emails to several web economists and have yet to receive a reply. Here’s what sparked it: A reader of a money mag asked about stocks in his 401k. He is in his 20’s. The reply was the same old same old; you have 40 years to earn a hefty 401k.
Really?
What is going to happen to the world markets in 2040/2050 when the world population is expected stablize at around 9 billion?
The capitalist economic world market we have created it to currently be is based on ever increasing sales and dividends.
(Top) shareholders are NOT going to be satisfied with stagnate steady earnings. (That would put them in the same scenario as I, a production worker, am now in. Just existing…)
I see a market collapse that makes 2008/09/10/11 look like a party.
It probably will occur sooner, 2025/2030 when they figure it out and decide it’s game over….who has the most toys?
I would encourage you all to google David Walker or see some of videos of his speeches on Youtube. He “was” the comptroller of the currency for 10 years (the accountant of the USA) before he QUIT. It’s not the fact that the baby boomers will withdraw money (it is estimated $300B per year). Just to give you an idea of what $300B is, the DJIA average yearly volume over the last 5 years was $394B (that is total volume). However, that figure is not my pmain point. 50% of retirees right now live below the poverty line. When 78 million baby boomers are retired do you really think a large majority will cover their own medical care? Walker states that the govt will either have to cut spending by 60% or taxes will have to double in order to bring the future budget to equilibrium…Why would you have $ in a volatile market (number 1) let alone through qualified plans where all proceeds are taxed at ORDINARY INCOME…