Ah, yes. Sell your stock and live on the profits. But sell to whom? Philosophers of finance are starting to wonder who’s going to buy the boomers’ securities when they cash in.
Without doubt, the demographic bulge has helped push stock prices up. Just as real estate went nuts when the boomers started to buy, retirement investments are now feeling the force of their irresistible will. If this generational pressure holds, stocks should be wonderful investments (give or take a few cyclical drops) for another 15 years.
Then the big balloon deflates. Instead of being net buyers of securities, boomers and their pension funds will become net sellers. They’ll quit saving money and start to spend their hoard instead.
If you’re among the older boomers (now around 45 to 50), you’ll find eager buyers for your shares. Stocks will be popular when you retire. Younger boomers will snatch them up.
But after the baby boom in America came a drastic baby bust. Fewer children were born between 1965 and 1975, so today there are fewer young adults to take jobs, join retirement plans and invest. Even counting immigration, the number of people 25 to 29 is currently shrinking by 1.2 percent a year-the first generation ever to be smaller than the one before.
So the younger boomers along with the nation’s pension funds will be selling securities into a shrinking U.S. investor pool. Stock-market gains will flatten out, says John Shoven, professor of economics at Stanford University. Real-estate prices will decline, and bond values, too.
Some observers carry these thoughts to absurdity. Craig Karpel, in his new book, “The Retirement Myth,” foresees a “great depreciation” lasting perhaps four times as long as the Great Depression and with similar, grim results. Shoven takes a milder view. Starting around 2015 or 2020, he sees a couple of decades like the 1970s: zigzagging stock prices, pleasing dividends, very little capital gain. Total returns may drop to $ or 4 percent.
Trying to think about 2020 is madness, of course. The future never unfolds as we think because conditions always change.
Take the drop in the price of bonds that Shoven expects. He could certainly be right, if new bonds are still issued at the high rates of recent years. But aging societies accumulate less debt, so there will be fewer new bonds to float, says Richard Hokenson, chief economist of Donaldson Lufkin Jenrette in New York City. With less competition for the income investor’s dollar, older bonds should be easier to sell.
And take the predicted slowdown in stocks. Three shifts in stock ownership might provide the market with some price support: (1) Boomers might stick with their mutual funds right into old age. (2) Baby busters, who already save and invest, might accumulate more shares per person than is typical today. (3) Banks and pension funds in the fast-growing Asian and Latin American countries may step up their purchases of U.S. equities -reason enough to give freer trade your ardent support. The wealthier foreign investors get, the more they’ll pay when the boomers are ready to sell their stocks.
Even with these offsets, however, pension-fund sales can’t help but have a wet-blanket effect. To prepare:
Follow the boomers. This bull is jumping over the moon, so keep your money parked in stocks. Don’t be too concerned if prices fall. Boomers will hustle back to buy. The lesson they learned in ‘87 was that even crashes pass.
Increase the sum you save each year. Extra savings, invested now, will take up the slack if stock prices lag after you retire. Employers should also expect to add extra funds to their pension plans. Some will refuse and drop their plans, says Sylvester Schieber of the consulting firm Watson Wyatt Worldwide–yet another reason to be saving yourself.
Figure on working longer than your parents did. The fewer years you’ll be retired, the less money you’ll need to see you through.
Bug your employer. More companies should be offering retirement plans. More companies with 401(k)s should be matching more of the money that their workers put in. A future Congress might mandate pension and savings plans if today’s voluntary system leaves too many boomers broke.
Plan to retire in the house you own today. Foreign investors might buy your stocks, but they won’t buy the houses that aging boomers want to sell. So real-estate prices will probably drop-especially in the northern states when boomers start their migration south. In the south, meanwhile, the cost of retirement housing will rise because not enough is being built, Hokenson says.
Your best defense is to stay put. Prepay your mortgage, own the home free and clear and let your heirs fret about what it’s worth, says financial planner Lynn Hopewell of the Monitor Group in Falls Church, Va. Reverse mortgages–which lend you money against the value of your house-should be widely available by the time the boomers retire. So you’ll be able to tap your home equities for cash, without having to sell.
Standards of living gradually rise. A middle-class retirement today will be lower-middle in 30 years, says Timothy Taylor of the Journal of Economic Perspectives in Minneapolis. But that also means that today’s middle standard will become easier to reach–slowed stocks or no. Not so terrible, I’d say.
