Ever since the first of the 77 million members of the baby boomer generation started to retire in 2012, the prognosticators of doom and gloom have been predicting a steady deflation of stock prices as the new retirees shed their portfolios of higher-risk equities. The surge in equity investments over the past few decades has been attributed in large part to baby boomers aggressively saving for retirement. Therefore, it would make sense that, with 10,000 baby boomers crossing the retirement threshold each day, there is a possibility that stock sellers could outnumber stock buyers for some time to come. However, there are several reasons why concerns over a boomer retirement effect in the stock market may be overblown.
Concentrated Equity Ownership
Equity ownership in the baby boomer population is concentrated among the wealthiest members of the generation. Nearly 90% of all equity assets are owned by just 10% of high net-worth boomers. This segment is less likely to sell off assets upon retirement, choosing instead to focus on estate and wealth transfer strategies to benefit future generations.
A Gradual Transition
The demographic distribution of the baby boomers is spread widely over 19 years. In 2016, about half are aged 58 to 69 years old, and half are aged 49 to 57 years old, so the transition of the whole generation will be gradual. Retirement behaviors also vary widely, which means they are not likely to act en masse in terms of their asset rotation. Any decline in demand for equities should be nominally felt by the stock market, which will find new demand from other sources.
The New Normal Retirement
Retirees today face a new set of challenges that are changing the way they manage retirement. Increasing life spans and higher retirement costs are leading many retirees to take a more cautious approach to spending down their assets. An increasing number of baby boomers are choosing to extend their careers; those who are unable to do so are finding alternative ways to earn an income in retirement. In either case, today’s retirees are more likely to hold on to a good portion of their equity investments to ensure lifetime income sufficiency. A study by Fidelity Investments found that 35% of investors between the ages of 51 and 69 are overexposed to equities by at least 10% over what financial experts recommend for an age-based asset allocation strategy.
Next Generations to Make up the Demand Slack
Over the same period of time that 77 million baby boomers are not buying equities, 140 million of their children and younger siblings are expected to migrate into the stock market. Individuals born between 1965 and 1999 have up to 60 years of investing ahead of them, with the highest concentration of equity inflows occurring in the next 30 years. It is estimated that $40 trillion of wealth is going to transfer from the baby boomers and their parents to the next generations over that same period of time, creating a boom in consumption and investing that will continue to drive the stock market.
Increased Foreign Investment
Foreign investments are pouring into U.S. stocks at record levels, and the trend points to more of the same for the foreseeable future. The United States is still perceived to be a bastion of innovation and economic power. U.S. stocks are considered a safe haven in the midst of global strife and struggling economies in China and Europe. As of mid-2015, foreign investors held nearly $6 trillion of U.S. stocks, accounting for 20% of the market. Market experts expect foreign holdings of U.S. stocks to grow to a third by 2025.