Stocks May Be Unscathed by Baby Boomer Retirees

The retirement of the baby-boom generation should not be a drag on stock prices, according to an analysis by Vanguard.

Vanguard researchers cited three key reasons why aging baby boomers won’t adversely affect the stock market. First, the baby-boom generation spans 19 years (birth dates of 1946 through 1964). Second, international ownership of U.S. stocks has been increasing. Third, historical data does not show a significant relationship between age and equity returns.

Though baby boomers are often grouped together, they will enter retirement over a prolonged period. The first baby boomers turned 65 in 2011 and the last won’t turn 65 until 2029. The length of the time-span implies any impact of their retirement on stock prices should occur gradually.

Net foreign purchases of U.S. stocks totaled approximately $109 billion in 2012, versus less than $6 billion in 1980, according to the Treasury Department. In percentage terms, foreign investors owned 21% of U.S. stocks in 2012, up from 7% in 1990. Vanguard thinks increased globalization will continue to boost foreign demand in the future.

Historical data shows “no significant relationship” between the proportion of U.S. retirees and long-term stock performance. Vanguard reached this conclusion after looking at both U.S. and cross-country data. Their analysis failed to find any clear relationship between the U.S. market’s peaks and troughs and population data.

Vanguard also noted that within the baby-boom generation, stock ownership is skewed to the wealthiest individuals. The wealthiest 20% of boomers owns 96% of all equities held by their generation. Their large net worth could mean sustained high equity allocations throughout retirement as they consider estate planning and wealth transfer strategies.

Finally, Vanguard says the current average portfolio allocation to equities by boomers is similar to that of the generation that preceded them. Baby boomers, on average, allocate 47% of their portfolios to U.S. stocks. Since this allocation is not unusually high for investors their age, the gradual shift to a more conservative allocation may not have any of the feared repercussions.

Source: “Baby Boomers and Equity Returns: Will a Boom in Retirees Lead to a Bust in Equity Returns?,” Vanguard, October 2013.


Larry Keefe from NY posted about 1 year ago:

Another aspect of this issue--which is often ignored in these discussions of asset allocation during retirement--is that a person retiring at 65 should still consider themselves a long term investor, i.e., one with a horizon of 10+ years. Actuarial tables indicate that boomers will generally have 20 or more years to live, and they probably should plan for at least 30. That means it's not likely that on their 65th birthday they're going to dump all their equities in one fell swoop, pay a huge capital gains tax, and convert everything to an annuity where they pay huge fees and face large inflation risks. People who have accumulated large enough holdings in equities to pose a threat to the market are in most cases intelligent investors, and that kind of strategy would be--to say the least--less than prudent.

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