As my parents’ generation (the baby boomers, born 1946-1960) enters retirement, a major shift will occur in this investing group from asset accumulation and protection to selling their assets to fund their retirements. There wouldn’t be a problem if the younger generations were comparative in size. However, because the baby boomer generation is much larger than it’s successor generations, in theory many more people will be pulling money out of the stock market than putting it in. If more money is going out of the market than coming in, the market’s could face a steady or abrupt decline for several years to come. Some people are arguing that this will be the largest stock market crash ever. Others are saying it won’t be a big deal, everything will be fine. So, who’s right?
To answer who is right or wrong, we need to understand some basic factors within this baby boomer demographic; Who within the group has the money, that is, do all boomers have retirement investments or only a portion of them? How will these people withdrawal their funds and when? Will retirees use all their money or leave some for their heirs? With the recent market correction are retirees going to push back the date, and work longer? These questions and other points will be addressed below to help shed light on who’s right and who’s wrong.
- “Withdrawals will happen gradually over time. Data generally shows that among retired households, assets are depleted modestly, if at all. A key reason for asset retention is the highly concentrated nature of wealth in the United States. Most retirees have relatively little asset wealth to sell, and those who do, typically aren’t likely to sell much in retirement. For instance, more than two-thirds of boomer savings is held by the wealthiest 10%, who will likely be able to support themselves from sources such as dividends without selling assets. On the flip side, about a third of boomers have no financial assets to sell.”
- “Cautious retirees. The households that do have substantial financial wealth are typically more cautious about selling assets to finance consumption. Many will hold onto their assets with the intention of leaving a bequest.”
- “Retirees continue to hold stocks. Although traditional investment advice says that retirees should reduce their equity holdings, retirees continue to hold a substantial amount of their wealth in stocks. In fact, households headed by those over the age of 70 had roughly an average of 60% of their financial assets invested in stocks.”
- “Putting off retirement. The demand for assets will likely remain high as boomers push back the timing of their retirement due to the “Great Recession.” Many boomers will continue to work past the traditional retirement age, decreasing the need to sell off assets. A recent study at the University of Michigan found that 57% of older workers say they expect to work full time after age 65 compared to only 47% a year ago. An increase in income earning years would decrease the need to spend down assets.”
- “Demand for risky assets will come from other sources. Increased foreign demand for U.S. assets could potentially offset lower domestic demand for equities. Savings in emerging market countries continues to grow rapidly as their local supply of quality assets is sometimes limited by political and socio-economic constraints. As a result, emerging market asset demand is channeled into developed market assets—such as those in the United States. In addition, Generation Y (those born in the 80s and 90s) is a population cohort that is almost as large as the boomer population, and they will be an increasingly larger purchaser of boomer assets as they enter their peak earning years.”
“The looming retirement of baby boomers is not likely to lead to a large market sell-off caused by lack of demand for risky assets. However, baby boomers may affect stock returns through broader macroeconomic means. Because the growth rate of the U.S. labor supply is expected to fall, return on capital may fall without significant productivity increases. Younger workers will have to bear a much larger burden in the future in order to support the increasing number of retirees. Given the political influence that seniors have, an increase in payroll taxes to support the needs of the boomers in the future seems plausible. Such an increase could represent a significant drag on U.S. economic growth.”1
In summary, Robert Kiyosaki, is in my opinion selling books by fear mongering. In addition, I’ve read multiple articles written by him and I remain quite unimpressed by his logic. Personally, I would avoid buying any of his books or even listening to him, period. On the flip-side, if you’re in to marketing, he may provide some value there, because he sure can sell his products, in spite of their obvious lack in logic.
1.“Will Retiring Baby Boomers Cause a Market Meltdown?
Evidence suggests a large sell-off is unlikely, but there is potential for
broader market impact.” 4th Quarter,2009, newsletter by Bremer Asset Management. The quoted information above was found here.