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The Mass Retirement Of The Baby Boomers

Price Headley
Price Headley
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Rather than our usual trading "stuff", today we'd like to shift gears a little and look at something that's becoming an increasingly hot topic. What's that? The massive numbers of retirees who are on the verge of dipping into their retirement funds, pensions, and social security benefits. A lot of investors are concerned about what effect that may have on the market, but we'll examine why the fears may be a little inflated. We'll also take a look at what (if any) affect the privatization of social security will have on the way the market performs.

A couple of caveats and qualifiers first, the most important of which is just to acknowledge that nobody really knows what the future holds. All sorts of things can change over a 25 year period. I expect that we'll have an alternative energy source within a couple of decades, and odds are that fiscal and economic policy will be adapted to reflect a changing society. And of course, social security will probably get an overhaul a few times (above and beyond the one that President Bush is considering now). We're not saying this dodge the question....we're just saying it because we know that the future will throw curve balls we haven't even thought of yet. Just think back 25 years ago to 1980.....who could have imagined anything like the internet, an obsolete space shuttle, and genome mapping? Things change, so don't set any of our ideas in stone.  

Second....we're not economists, nor social scientists, nor politicians. We're traders.......and short-term traders for the most part. The extent of our thoughts here doesn't really venture much past that, except in the sense that there's a certain psychological aspect to economic data. So if we don't fully address every facet of a question, it's just because it's not part of our scope. We'll come back to this idea later...and make a very important point.

Finally, today's question actually came in several parts. To make it easier to follow our line of reasoning, we'll just insert our responses within the questions. The reader's notes all start with 'Q', while our responses all begin with 'A'.

Q: I am trying to understand what happened in the stock market over the last 25 years. I can get a chart of the Dow on going back to 1925. Around 1980 you start to see the volume increase noticeably. This was the beginning of the proliferation of Mutual Funds. I know they have been around longer then this but this was when many, many companies allowed their employees to contribute from their paychecks. It was the rise of Mutual Funds dollars that caused the Dow to reach 10,000. You can see the volume explode on the chart (not shown here).

A: Initially we were going to offer an alternative to this point of view, suggesting that it was the Dow's rise to 10,000 that actually gave rise to the multitude of fund companies. The theory was that greed and regret of missed returns created a new demand for the mutual fund industry. However, after thinking about how the majority of the investing world thought back in the 80's, we're siding with the reader. The reality is that the two pieces (mutual funds and the market) probably propped each other up. But like the reader stated, being able to make direct deposits and enjoy the benefits of tax sheltered growth in employee-sponsored retirement accounts really did make mutual funds a common investment in the 80's.

Q: Now that the baby boomers are retiring they will be taking money out. Since there are fewer workers there will be less money going into the market. This should cause the Dow to go down over the next 25 years.

A: This seems to be the ultimate concern about the next two or three decades, according to the buzz on the street. But honestly, of all the things I think there are to worry about, this is the least of them.

To really understand why the market will survive a high degree of retirement money being drawn out from it, let's first compare the theory. Back in the 80's, all kinds of money was being poured into the market through mutual funds. All those investing dollars created a lot of upward pressure on stocks, but there wasn't a lot of money coming out. Throw in the fact that stocks have historically moved higher anyway, and no wonder we saw the beginning of a long-term bull market!

Now that all those investors are reaching retirement age, the market is worried that the outflow will undo all the gains that were created during that time. But there are a couple of key differences between the 80's inflow and the potential outflow we'll soon face. First, in the 80's, it was just cash coming in. But now, it's not as if the only direction is going to be outward. People are still putting money into the market, so the outflow will be at least partially offset by the inflow. Second, the market is supposed to go up! Even if there had been no new money coming into the market, stocks still could have made gains in the 80's and 90's. The point is, funds aren't the only reason stocks gained then; the other reasons stocks moved higher back then are still in effect today.

The other thing to think about.....this wealth is not going to go away - it's just going to be transferred. Ultimately, it will stay in the economy, which in turn means it will eventually fuel economic growth. While pension plan recipients may be getting cash, what are they going to do with it? These people are either going to spend it, or re-invest it in the market outside of the pension plan. Some may even put it into a money market, but even then, the banks lendable reserves will be increased. So, somebody is going to benefit from it. The worry for investors is that none of this money will get re-invested in stocks, and that there won't be as many buyers around to keep the market headed higher. I think these retirees may re-invest more than most of us even realize, but even if they don't invest it, there's still an upside for all of us. Not to make light of the issue, but let's face it.....what are all of these older people going to need? Healthcare, medicine, and hospitalization. The healthcare stocks could enjoy a multi-decade boom. What are these older folks NOT going to need? MP3 players, DVDs, and all the technology that seems hot right now. Again, we're not trying to make light of it - we just want to be realistic.

Point being, companies are always going to find a way to make money. As long as their earnings are growing, their stocks will be moving higher. Maybe not all stocks will head higher, but some of them will have to.

The other worry the reader brought up is a good one - there are going to be fewer people paying in and more people taking out of the Social Security pot soon. We'll address this below, but it is a legitimate worry. Hopefully those few contributors will have a considerably higher income than the previous generation did, and will be able to offset the greater demand being placed on their paychecks. Statistically, though, this isn't the case yet. As is stands right now, the generation after the baby-boomers (the gen x-ers) is on track to actually have less affluence than their parents did. However, we still don't anticipate that being the demise of the domestic economy.

The worries that have stemmed from mass retirements in the near future have been debated at length, and understandably so. I'll just pose this question - do you believe it or not? Is it really possible that the market could fall for 25 years, or are we just overly consumed with the magnitude of the idea? Don't assume it's too crazy to be true, although it's very unlikely. Here's the litmus test. Pretend you're going on a mission to outer space and won't get back for 25 years. You have two options before you leave, but you won't be able to change your mind until you get back. You can bet that the market will be higher when you get back in 25 years, or you can bet it will be lower. I know it's a ridiculous scenario, but it says a lot about what you really expect. Which bet would you really be willing to make?

Your first response might be "but a lot of things can change in 25 years". We agree completely.....and that's precisely our other point. Even if we were able to deduce what the future holds in store based on today's data, it would be futile. This brings us to the last section.......and back to the first one.

Q: The only thing I can see that would cause it to go up would be the Private Accounts that Bush is touting for Social Security. It would provide the same influx of dollars that the Mutual Funds provided.

A: For similar reasons as to why the mass exodus from retirement funds won't destroy the market, the privatization of Social Security won't usher in a new era of bullishness either. It certainly won't hurt the market, especially with all the compounded effects of it.....but it's not going to save a sinking ship. If the market truly is in need of life support, it will take more than Bush's plan. But, at least it's a start.

On a semi-related note, United Airlines' recent pension fund default should raise some worries for everyone. With the first major one behind them, it's now going to be much easier for other pension plans to do the same. Is anybody feeling a little more anxious about your pension plan now? I can't say I blame you. Will the same problems plague Social Security? Not that Social Security is going to go into 'default' in the traditional sense, but as the reader correctly stated, there are going to be fewer Social Security contributors, and more Social Security beneficiaries. Somebody's got to pay the piper. Will it be the contributors, in the form of more taxes and less benefits?

So now we've come full circle, and we can explain a very important point we made early on today. We're traders, because at least in trading, you can see your future. We may only be able to see a few days in advance, or a few weeks if we're lucky, but that's enough. Our destiny is in our hands, and we don't have to guess what our future will be, since we don't have those long-term models. In comparison to all those long-term investors who thought United Airlines' pension fund would come through for them, being as trader looks considerably more attractive. And if you're needing a decent return on your money, there's no way Social Security (in its present form) is going to do that. And if the long-term market does indeed suffer as much as some folks think it will when all these people retire, then buy-and-hold can't do it for you either. That leaves self-directed 'trading' as a very attractive choice.

Like we said, nothing is ever set in stone, and we don't have the corner on reading the future. But hopefully - even if you disagree with something we said - you've gotten something out of today's discussion. We enjoyed writing it.

Price Headley will be available to take your questions until Thursday, June 16. Please use the form below to submit your questions.

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