Thursday, November 19, 2009

As boomers pull out funds, will they pull down markets?

Robert Powell
Robert Powell
Sept. 10, 2009, 12:01 a.m. EDT

As boomers pull out funds, will they pull down markets?

CBO says financial markets won't suffer as millions retire, but some disagree

By Robert Powell, MarketWatch
BOSTON (MarketWatch) -- Many wise men have predicted the stock and bond markets will go into a free fall for decades once baby boomers start withdrawing money from their retirement accounts, but a new report this week by the Congressional Budget Office suggests that won't happen when boomers retire.
"Some economists have warned of the possibility of a dramatic decline in demand as baby boomers sell off their assets to finance their retirement; they assert that the sell-off could cause a dramatic decline in prices," Douglas Elmendorf, director of the CBO, wrote in his report.

Should Lehman Brothers have been saved?

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"An evaluation of the evidence, however, indicates that such a dramatic decline in asset demand and prices is unlikely," he said.
If only that were true. But some people disagree with at least some of the CBO's findings.
"The CBO report provides some ideas, but has a long way to go before resolving the question" of whether demand for and prices of assets will fall as boomers retire, said Alan Gustman, a professor at Dartmouth University, and Thomas Steinmeier, a professor at Texas Tech University.

Demand for assets

For its part, the CBO said it makes sense in principle that if more people are selling assets to finance their retirement than are buying assets, then stock and bond prices would decline. But the empirical evidence, the CBO said, doesn't bear that out. Earlier groups of retirees didn't sell their holdings en masse to the fund their retirement.
Several factors probably explain the evidence, Elmendorf said in the report. "First, retirees generally are cautious about selling assets to finance consumption because they might need those assets in the future: They might live longer than expected, and medical costs, which are likely to rise as people age, could be higher than anticipated. Second, rather than spend all of their assets, retirees might intentionally retain some to make bequests.
"Third, wealth in the United States is highly concentrated: One-third of the nation's financial assets is held by the wealthiest 1% of the U.S. population. The wealthiest people do not spend significant portions of their assets during retirement and in most cases die leaving bequests."
What's more, the report said demand for assets will remain high as baby boomers push back the timing of their retirement due to the recent market turmoil. "Some baby boomers who have lost or spent a significant portion of their assets may defer retirement, shortening the duration of retirement and reducing the amount of assets needing to be sold to finance consumption," the report said.

Will prices fall -- or won't they?

The CBO also said it's unlikely stock and bond prices will fall as boomers retire. "Empirical evidence has not revealed much connection between demographic trends and the price changes observed in financial markets."
Some economists agree with at least some of the CBO's findings.
"Couples in particular do not decumulate [spend down their assets] until late in life, so the immediate effect of boomers retiring will be small," said Michael Hurd of the Rand Corporation.
But he and other economists take issue with plenty else in the report. For one, singles do decumulate early in retirement, Hurd said. What's more, he said even though boomers may not decumulate assets, they will no longer be saving after retirement. "Thus a change in asset demand will result from people moving from an accumulate phase to a neutral phase," he said.
To Gustman and Steinmeier the problems with the CBO's view of the world are many. "There are three additional factors that we would like to have seen discussed in the CBO report," they said. "Each of these omitted factors would, in fact, reduce net assets."

First, according to Gustman and Steinmeier, the CBO incorrectly dismisses the presence and importance of defined-benefit plans. According to Gustman's and Steinmeier's forthcoming book "Pensions in the Health and Retirement Study," most people retiring today have a traditional pension plan. In fact, two-thirds of the pension assets of people near retirement age today are in defined-benefit plans.
In plain English, those retiring today won't draw down their stock and bond portfolios because they don't need to. But as more boomers retire without a traditional pension plan, the need for them to draw down their IRAs and 401(k)s will be greater. Thus, the big whooshing sound you hear.
Second, Gustman and Steinmeier say that by focusing only on personal wealth, the study ignores the effects of Social Security's financial problems. "Over 30% of the wealth of those approaching retirement is in Social Security," they said. "As the boomers retire, that wealth will be drawn down throughout the retirement period, creating additional government debt. Of course, under-funded, government-insured health expenditures will add to these liabilities."
Third, the effect of the stock-market decline is only one of the factors affecting baby boomers' retirement picture, Gustman and Steinmeier said. In their paper, "The Retirement Age Population and the Stock Market Decline," the professors said the stock-market decline alone will lead to an average postponement of retirement of no more than a few months.
However, the effects of layoffs of older workers must be factored in as well. "Layoffs reduce total compensation from full-time work even for those who find another job," they said.
"As older workers are laid off as a result of the current recession, many will have a great deal of difficulty in finding new jobs that will pay wages nearly comparable to what they earned in the past. That will lead some to retire earlier than they expected. Should net retirements by older persons be accelerated, they may draw down their pensions and other assets earlier than they had planned."
The net effect of that, Gustman and Steinmeier said, is that there's likely to be a reduction in net assets.
That suggests a bear market, maybe even a two-decade-long bear market.

Read the CBO's report at this Web site.
Robert Powell is the editor of Retirement Weekly. Learn more about Retirement Weekly here .
Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.


Baby boomers may not pull a bunch of money our of their 401Ks/IRAs each year. But I bet some of them, like me, will be transferring more to conservative funds like money market, stable value bond funds as the years pass. We've tried to build those balances the last few decades while we were working and hope we don't start drawing out too soon.

But my theory is that the more you have, the more you can risk (as in stock funds). The less you have, the more conservative you need to be. In the not so distant future, it will start to look like the money we have in those plans will be needed sooner rather than later.
When it comes to the boomers' effects on the economy, their investments are just one part of the equation - you also have to look at their spending. If they don't take much money out of the equity markets to live on (a good thing for the markets), they won't be spending like they used to either, which was another driver of the economy. There aren't as many of the next generation to pick up their spending on durables, household items, clothes, etc. at retail which the retirees no longer need anyway since they are no longer in acquisition mode but downsizing. And, in the perfect storm, this recession is going to make several generations more cautious about spending the way the boomers did. So there will still be a depressing effect on the equities markets and the economy as businesses cut back with less consumer demand.
As a boomer who finds himself in the middle of my age group, here is what I am pursuing. After being a biochemist for 29 years, raising four great kids, and paying all those taxes along the way, I have been laid off by my corporation. Seeing this coming 1-2 years ago, my wife (who also works full-time) and I began buying properties here in Upstate NY in 2008, fixed them, and are renting them out to graduate students and many who work in the Health and Education fields.

We now have a quarter million dollar business (gross) and still growing. We need a property manager to handle the increase in tenants, repairs, etc.. Too bad Obama conveniently forgot the small business person, which everyone knows makes up 50% of this country's employment. I would have proposed at least a $15,000 tax credit to small business (1-200 person company) for each person hired full-time plus I could add $10,000. 1 million business's hiring 1 person equals 1million people off unemployment at annual cost to U.S. gov't of 15 billion dollars, NOT THE BUDGET BUSTING NUMBER OF 798 BILLION FOR JOBS THAT ARE TEMPORARY!

Housing prices in Onondaga Count, NY have only fallen -1% from 2008 to 2009, according to recent statistics. Even if they fall more, so what, my properties are basically Income Funds, paying a monthly "dividend" (minus bank mortgages, repairs, personal Income Tax). There are many more people out there that have to rent because of the tougher bank lending standards, which should have been in place in the first case, anyway, rents are stable if not increasing since 2008.

I am not investing in stock equities, for now, rather I am buying and selling in the bond market; plowing my profits into such bond funds as BND, AGG, and EGF. In 10-20 years I will sell everything (houses), and even if I price in an Armageddon figure of 40-50 cents on the dollar for each property, I still will have invested and diversified my rent profits, get my 20% down payment back, and now the banks are almost paid off with some equity left, maybe (worse case).
Boomers still have more money than any other age group in spite of the recent markets' swoon. Follow the money people!

Marketers wastefully spend their time and companies' money targeting 18-35 yo's when the majority of stored wealth and purchasing power lies in the 50+ range. Unless these 50+-somethings part with their money, there will be no pick up in economic activity. But, eventually, at some point, Boomers will de-cumulate or dis-invest to fund their lifestyles sans income from employment. Those same 50-somethings will at some point sell assets i.e. stocks, bonds, and real estate, the question is: To whom will they sell, who will buy and at what price? In order for them to de-cumulate or dis-invest, they will need to sell to those who are younger and hopefully have rising incomes to support their purchases. Otherwise, asset prices will decline. How Boomers decide to spend or save and how younger generations fare in regard to their incomes and investments will determine the future course of the economy and our collective futures.

There is a fallacious assumption made by many financial wonks, pundits and talking heads who believe that retirees will need to live on the same income or more, adjusted for inflation, than they earn during their working lives. They fail to realize that many will in fact downsize their lifestyle and with that their need for the same amount of pre-retirement income. Those who can afford to retire, do so because they had the discipline to live below their means during their working lives while they were accumulating assets and wealth. Those who chose to live aspirational lifestyles did so at their own financial peril; as they are now realizing that they cannot sustain or support that lifestyle ad infinitum without sacrificing their retirement. The same profligate spenders will realize that even if they continue to work they will not earn the same amount of money as the labor supply exceeds its demand and hence lowers the price -income- of labor, and therefore, once again they will learn that there is no free lunch when it comes to economics. It's truly a zero sum game where a dollar spent is a minus to the spender and a plus to the saver. Money is not lost it is merely redirected to the saver and invester, redistributed from weak hands to strong.

For those who have accumulated wealth and have been downsized or chose to retire early, and who did not lose money in the recent market meltdown, they will shift to a neutral spending pattern, simply maintaining what they have. That will not bode well for the economy. The unknowns for retirees are still: taxes, inflation rate, longevity and health care costs; obviously too many variables to know with certainty and therefore requiring the prudent to be financially conservative and spend much less than they once did in order to prepare for an unknowable financial future.

For those boomers who are unemployed, but, still have plenty of assets, should they be re-employed, they will continue to save as they always have, but, most importantly, they will spend more than they would in an unemployed status, thus, goosing economic growth. The choice is up to the G and the companies who are smart enough to realize this and the fact that they could rehire those boomers in the 50+ range for less than they think. The re-employment of this group would allow for a smoother economic transition that would benefit Boomers and the younger workers who are destined to replace them as the Boomers transfer their corporate knowledge, life's wisdom and work habits to the next generation. This would also be a plus for the companies who employ this strategy and for the country as a whole.
Just MHO.
As one of those so called retiring baby boomers (6 years now), my fear is that my dollars are becoming worthless. I'm putting them into the market, into gold, and into copper to protect against the coming inflation and devalued dollar. If everyone is thinking like me, then the market will rise but the dollar will crash. It is survival in the coming galloping inflation.
This CBO report is another example of "looking backwards", ignoring demographics, and ignoring the programs they know are coming THEY KNOW they Medicare is in warning status. They know SS has no future COLA adjustments like the past. They know the state of the dollar. It is just silly to use what people "use to do" before the crisis and IGNORE the changes that the CBO KNOWS are coming. Compared to prior generations, this generation is looking at cuts in Government benefits that will equal their net worth (on the average) at the date of their retirement.
Cyclone and MrMoney

You are both ignoring the 800 pound gorilla in the room, and that is the fact that population growth is no longer a problem, and 6 billion is likely about all the people that will populate the earth at one time. A shrinking population in most of the developed world will be the larger issue for our economies. Immigration will cease to be an issue here, and will become a necessity, as more and more workers are needed to pay the taxes required to support our aging population with the entitlement programs we have promised them.
"Empirical evidence has not revealed much connection between demographic trends and the price changes observed in financial markets." - WHAT?

This article smells like propaganda giving you cause not to panic about the inevitable!
I guess giving them a little more time to squeeze $ out of the baby boomers.
But possibly not.
Maybe just naive state workers pushing for an economic comeback (which ain't gonna happen for the USA)
Any way - Sounds like you can bet on the exact opposite happening to what these guys say!

Harry Dent Author of The Great Depression Ahead is my expert on demographics:

I agree with him on 90%
But I feel:
1. The Great Depression is already started = Effects will not be as bad as the Mort. crises has already taken us so far down.
2. The masses of population in Brazil, Russia, India and China will save America from the greatest impact. (World population has more than doubled since 1950)
3. And lucky for you. America has imported almost 20% more population in ages between 30 to 40 years. Their positive contribution to the economy will support the masses moving into retirement.

Something for you guys to think about.
I strongly recommend the link supplied if you want to survive what IS coming.
One simple forecasting tool predicts, with uncanny accuracy, the health of the economy and the stock markets over many decades to come: the (demographic) Spending Wave.

Mr. Dent first used the Spending Wave in 1988 to predict the raging bull market of the nineties long before it became obvious. At that time, he stated that the Dow would reach 10,000 or higher and that this boom period, characterized by high domestic productivity and falling interest rates, would last until approximately 2010. By adding immigration data to my original model and making a few other adjustments, he raised his Dow forecast much higher. This fine-tuning increased the accuracy of the Spending Wave without changing its fundamental reliability.

The Spending Wave predicts the health of our economy by lagging the birth index forward 46.5 years. Why this number? That’s how old each of us is when we reach our predictable peak in spending today. By our mid-forties,the average American family has purchased the largest home we’ll own and all the furnishings to go with it, and we spend money on clothing, food and education for our teenage children. Once the children leave the nest, the fixed costs remain the same but variable costs suddenly start dropping. Though this frees capital for discretionary spending, it marks the end of the necessary family spending that drives the economy.
What Mr. Dent’s discussion fails to include is the US workforce reductions created by the population declines of the 1960s and 1970s. Without increasing immigration, the GDP would likely fall due to the reduced purchasing power of my children and that of my retiring or death. Now that my kids are entering their prime purchasing age, we as a nation are experiencing the lack in their purchasing power. The younger generations cannot match the purchasing power of their baby boomer parents. As a result, we have the housing bubble that started in 2005 and the younger generation’s inability to acquire all the homes inspired by the housing explosion of the past. Now factor in the reduced baby boomer purchasing power resulting from the present economic crisis, the loss of value in their homes and their fading from the scene.

As Dent’s chart shows, the birth rate will fall until the population increases of the 1980s kick in between 2020 and 2025 and will likely not reach the levels of 2006 until away past 2056. As a result, the GDP should suffer without a heavy dose of immigrants.
The author of this story omitted several key factors.

First, its not like the U.S. baby boomers only own U.S. equities.

Some own international equities.
Some own bonds.
Some own real estate
Some own CD's.

So it is not like they will suddenly pull the trigger and sell equities only to raise cash.

Second, all U.S. equities are not owned by old U.S. investors.
Foreign investors own a lot of U.S. stocks and may not sell any time soon.
Many equities are owned by sovereign wealth who have no plans on selling.

And while it may be true that aging baby boomers may scale down their investment purchases, we do have a younger generation that will need to save like never before.
They don't have the luxury of appreciating real estate that boomers had.
They can't count on social security like boomers have.
There are far less pension plans offered to the younger generations.

So younger people have no choice but to invest heavily in stocks and bonds for their own future.

So bottom line is that boomers do not make up all the demand for US investments- far from it.
Demand will be there from younger generations and foreign investors.
And many boomers have pensions, social security and won't have to sell- they will leave an estate for their children to spend/invest.
It has long been forecast that boomers would significantly impact every facet of society much like a pig moving through a python.
Consider if you will:
1) The number one fear of the elderly is outliving their money. As people age they become increasingly more conservative in their expenditures.
2) Life expectancy is rapidly increasing and will continue to rise. Today average life expectancy is 78. At the turn of the last century it was but 52.
3) This market has yet to experience a major correction. We face more problems than we have resolved (energy dependence, unaffordable entitlements, a disproportionate percentage of society retired, unwinnable wars, falling dollar, declining standard of living, etc). That drop in value will either further erode equity assets or scare boomers to more conservative and income certain investments with what is left.
4) Boomers are historically POOR savers. They have been big spenders, heavy borrowers, known for their need to consume, not save. As a result they are unprepared for retirement, will be likely to defer retirement and possibly work until physically unable. This group is heavily leveraged compared to their parents.
5) Typically, marketing does NOT target seniors because they are atypical spenders, certainly not reflective of the historic perception the American consumer has insatiable appetite to consume. Right now boomers are in their peak earning years.
6) Given the onset of boomers attaining retirement age I fully expect them to seek smaller and less costly housing. Some is attributable to lower income, an attempt to wring some equity out of their existing home, but also to bring operating expense in line with lower income.
7) If, as I expect, we will be decades digging out from this economic malaise, boomers, even with investments, will be shifting out of stocks that have or will reduce dividends.

Just imagine the huge shift as boomers migrate from consuming, paying taxes, investing, etc to becoming an economic drag on our society. And yes, I am a boomer.
I can only respond by citing my personal situation and many of those that I know which includes people that are millionaires to those with almost nothing.

The stock market decline took at least 30-40 percent of the wealth away from middle American on up. Many have decided lately because of increased cc minimum payments to reduce or eliminate any further 401k contributions. If companies do not contribute the incentive is almost entirely gone to continue putting money into 401Ks that often are rather limiting with their selections. Our 401 has been with several investment groups that we had nothing to do with deciding that fact. Often there are only handful of funds that we are qualified to invest in. Both my bank and company have switched funds this year due to poor performance this past year. Again, we have zero control over this. We once were invested in a company pension plan that was easier to decide when to get in and when to sit it out. Back in the 80s when the market crashed, everybody I knew that worked for this mega company contributed the most they could knowing that the price of the stock was ridiculously low. We even took our private money and bought more stock outside the 401K contributions. I wish I had bet everything I owned at that time because we knew the company very well and knew our investment was very safe. 401 investing today is like throwing darts. I hate it. I would do so many things differently if I had to do it all over again. We all got conned.

This is what I know. I have lived in many regions of the country and for personal reasons I have always been rather drawn to the greatest generation. I found my generation, baby boomers to be spoiled and self serving. The greatest generation mostly lived frugally and also was guaranteed a company pension. That combination is a winner. The retirees I knew and spent a great deal of time with took very nice trips every year until they couldn't, but they lived in very modest homes. I think baby boomers would balk at such modest homes. Those retirees had long ago paid off their homes and cars and settled into a life pretty much devoid of stress. They just plain didn't want much. My mother was one of them. At the time of her death, which was 83, she may have had about 90,000 left in the bank. Nursing homes prior to that ate up much of her wealth. My mother-in-law the same situation. She lived in a very nice condo complex in Fla and barely spent any money. Everybody living in that large community had just a bit of SS and some savings that might have amounted to 50,000. My aunt that uncle the same.

The baby boomers are relying mostly on SS and a touch of those with a pension, but mostly that up and down 401 plan. After this year's slaughter many of us are just trying to preserve what we have and pay off any debt we have and learn to live with a lot less. We have flat run out of time. The thousand of lake communities in this part of the country have all their second homes for sale. The boomers are cleaning house. Those privately investing have ceased to do so. They don't trust the market and have turned into those loathing the government. Many still have high school kids to get through school.

The baby boomers may find some part-time jobs to supplement their drastically reduced income stream. I know millionaires that have ceased investing but can't find investment instruments with security and a decent return. So if you retired with 1,000,000 thinking you could get a 5 percent return and now can only get a 2.5 return that is a huge income stream reduced. Prior to this crisis many thought 7 or 8 percent was doable, but now.... The more time they have now to understand the markets the less they like what they hear. Ignorance is often bliss.

At the time of Biden's nomination, his financial records were revealed. He had few investments and in fact a 770,000 mortgage on his home that is probably worth a lot less today. He is at retirement age currently. He of course was counting on his much younger wife and her pension and his government pension and so he apparently didn't investment much at all according to records released.

Less than 8 years ago when we bought a farm, we looked at many large pieces of property. What I found out with this long property search was how many baby boomers that lived large and looked like they were very rich were highly leveraged. They owned multiple properties but at closing frequently had to pay to close. They had long ago borrowed that money.

Things are rarely as they appear. The CBO in this case is WAY TO OPTIMISTIC.
The Gustman and Steinmeier analysis while adding somewhat to this debate falls well short of the mark in its myopic focus on the "big selloff". They simply did not look at the asset most likely to bear the brunt of the Great Retirement--housing.

While defined benefit pension plans will see withdrawals, those plans that are not in "closed" status (think state teacher retirement, large corporate plans, state and federal plans) are set up to service a population that is assumed to go on in the future; that is, just because some members are retired doesn't mean that the company or governmental entity will cease employing additional people, new teachers not be hired, etc., etc.

Their concern over asset drawdowns on financial valuations is misplaced. Rather they should look at the effect on housing, as many Boomers have stated in surveys that they expect their homes to provide the funding for their retirement. Unlike financial assets, residential housing assets are very broadly held, and unless buyers can be found for the properties being sold to fund the Great Retirement, housing prices might not only never come back to 2002-2004 levels over the next 15 years, these prices might actually slip another 20-33% as wave upon wave of Boomers search for money.

All this is further compounded by the fact that I can sell my financial assets to someone in India, China, or Brazil without difficulty. However, that cannot be said to be true of my house. Stock is fungible, but my house needs to be sold to someone else who wants to live at that precise geographic location. Those in SMSAs with growing elderly demographics better take note and sell early (before 2018) if they will be able to sell at all.
"There is no means of avoiding the final collapse of a boom brought about by credit expansion.

The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

-Ludwig Von Mises
Look back to the time when we had balanced Trade , and a Recovering deficit from a Time of Inflation , and what was making those wheels turn in that direction ........then look to when those wheels were changed to reverse mode ..... and argue to the fact that while there were contracting deficit spending balance in Government , in the late 1990s , the Real Growth in Markets was declining and lead to the tech bubble crash in 2000-1 because of the devaluation that was taking place in the relocation of Jobs/ wealth creation from the change in Trade law , BUT , If we would have kept the dollar sound through our Reagan / GATT Tariff Trade rules in the 1980s would we have kept our Capitalists system solvent and leading the world economies to better quality of life achievements , like it has done forever , so that the rise of Social Justice would not be rising up in the debate on Equality ???? I believe the Change of Tariff Law back in 1994-95 was the beginning of this demise we see today , and the Giant Sucking Sound Ross Perot talked about in the 1992 Presidential Campaign ,

Subject: Please read this ; The Road to Socialism USA

Please read this , and ask if America would have built all that we have consumed over the past 15 years of Tariff Free Imports , the very Tariffs that would have been paid to offset the losses to Medicare and Social Security , for the loss of wage deductions that by relocating jobs out of the USA has caused , which everyone keeps forgetting to talk about , that maybe we wouldn't need Socialism ???

The High Cost of the China-WTO Deal
Administration's own analysis suggests spiraling deficits, job losses
by Robert E. Scott

Or was it all planned ???
I work for a large Japanese multinational. Before that I worked for a Swedish multinational. I have known and worked with many Europeans and Asians of several different cultures. The standard line is "It's a great system as long as you don't get sick." I also hear a lot of "It's free but you get what you pay for." I know two Dutch who received absolutely NO TREATMENT for cancer after they were diagnosed. Their doctors basically said, "Get your affairs in order." as soon as they made the diagnosis. Each one died less than a year after diagnosis although they did give them plenty of morphine to dull the pain.
If you really want to know how good the French and other European "free" systems are, then I suggest you take a look at the recovery rates for prostate cancer. In the US we have a recovery rate of close to 90% because we treat prostate cancer. In Europe, the recovery rate hovers around 40% because they do not treat prostate cancer. It is a painful and lingering death when untreated.
The Euro systems are actually a self fulfilling method of murder. The doctors know they don't have the funds to treat serious illnesses, so they don't, then they tell the sick patients; "See, your chances of recovery are slim, so we can't throw money away treating your illnesses."
To answer your question, yes, I have been out of the country so often I'm on my third passport. That is precisiely why I do not want a European or Japanese health care system. I look at healthcare as a luxury item which I am able to afford. I do not want to turn my healthcare decisions over to a doctor whose only incentive is not to spend my own money not treating me.
And the reason why the French may seem healthier than us is because as soon as they get sick, they die. You don't see many old, obese, or infirmed French hanging out at sidewalk cafes. The faster they die, the less money is drawn from the system.
I understand that car wreck victims and women delivering babies get speedy service, though.

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