How Will Retiring Boomers Impact the Stock Market?

 
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We’ve got 78 million Baby Boomers set to retire in the next 20 years, which will place a huge burden on our economy. At an average of about 10,000 retirees a day, our healthcare and social services systems will be strained to their limits, as the country has to find a way to cope with the extra demand. One area of this that isn’t frequently talked about is the stock market. Boomers’ pension funds consist of stocks, shares and bonds — to simplify matters a bit, as there are plenty of other ways to invest money — so their retirement funds can continue to grow each year. With so many Boomers and so many of them set to retire in such a short timespan, how will they affect the stock market?

They Will, or They Won’t

It really depends on who you talk to, as opinions vary wildly on this subject. With 78 Baby Boomers having put their money into 401(k)s and other stock market funds, sources like HSBC predict that “boomers are likely to be a drag on stocks as they turn into more conservative investors as retirees, trying to make their wealth last through their final days.” HSBC reports that the idea of non-boomers buying the shares that the boomers sell won’t work as well as in theory, with a reduction in global equity portfolio holdings of 43%, down from 51%. They say that even with investments growing in totality and emerging markets soon to own 50% of global equities — an increase from 15% right now — it won’t be enough to offset boomers withdrawing from their pension funds.

They also note that an imbalance could occur with local and foreign markets. Let’s say the US has, say, 1,000 shares out of a possible 10,000 in the world and boomers will account for 400 of them suddenly being sold off. This doesn’t necessarily mean that foreign markets will be in any rush to scoop up these now-available stocks, bonds and shares, as they could be focusing on growing their own markets. If that happens, it’ll leave the 400 shares that boomers have sold off still floating around in the stock market ethers.

However, if you look at sources like investment firm Vanguard, there’s no chance of a stock market doomsday happening. They look at how not all Boomers were born on the same day or will retire all at once, but rather spread it out over about 20 years. As well, they acknowledge that some Boomers have already retired years ago, while others still will keep working well past their age of retirement. Their prediction is that in spite of the sheer size of the Boomer generation, the bulk of Americans will still be investing, tax-paying citizens, which will more than balance out any unevenness.

Vanguard also acknowledges Boomers’ tight grip on all equity assets (noting that it consists of 47%, not 43%), which is a big leap from the 8.4% they owned when they were in their 30s and 40s in 1992. However, when compared to pre-retirement adults at that time, the numbers still come pretty close together: 45.8% of adults aged 46 to 64 held equity assets. This can be analyzed in two ways:

 

  • 1. As people get older, they increase their activity in the stock market.
  • 2. As Boomers retire, younger adults will start playing the stock market more, and once again match the 45-47% of equity assets currently held.

 

Even More Confusing News

We talked briefly about how a sudden influx into the market of equity assets and other investments held by Boomers won’t automatically mean foreign investors will grab them up.

However, opposite to that, Vanguard notes that the strengthening of the US equity market in recent years means less of a reliance on US investors. This has been because foreign investors have taken a greater interest in the US market, leaving American investors not feeling so much like they have to stay home and invest, but can rather explore their options overseas.

So what does this mean? Will the sudden mass retirement of Boomers spell disaster for our stock market? Or is it a case of overblown hyperbole designed to scare people into buying shares?

Our vote is on the latter. While the stock market has been known to react to volatility and loopholes (see: Great Depression, Great Recession, dot.com bubble bursting, etc.), there are enough rules and safeguards in place to ensure that it’ll rebound. It may feel a small effect but for the most part, it’s doubtful that one generation could destroy it entirely.