Maybe Baby Boomers Won’t Tank the Stock Market by Cashing Out

The enormous Baby Boomer generation, oft-described as a swallowed pig moving through a python, could harm investment markets as they cash out shares and bonds to fund their retirement. The same concern extends to the residential real estate market—as they downsize their homes.

How big a threat is this to institutional investors, which depend on these traditional asset classes to provide for pension beneficiaries and meet other obligations?

By 2040, the number of people older than 65 in the U.S. is expected to increase to almost 21.6% of the country’s population, up from about 16% in 2018, per the U.S. Administration on Aging. With the aging of America, people over 70 now own the most stocks and mutual funds, 33% as of 2021, versus 22% in 2006, Federal Reserve stats show.

The International Monetary Fund described an unpleasant scenario of an aging population in a 2014 paper: “As retirement approaches, individuals become less willing to tolerate investment risks, so they begin to sell off stocks. Thus, the aging of the Baby Boomers and the broader shift of age distribution in the population should have a negative effect on capital markets.” Over the past 10 years, however, that did not happen.

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What about the next 10 years or more? The dire Boomer cash-out scenario strikes a number of strategists as implausible. “They’ll take the money out gradually,” says Salvatore Capizzi, executive vice president at investment advisory firm Dunham & Associates Investment Counsel. In the late 1980s, “when I got started, we expected people to live until 80. They live a lot longer now. If you retire now at 65, you have another 40 years, another lifetime.”

Encouragingly, there are enough younger folks to possibly offset any Boomer cash-outs. The two generations behind the Boomers are not small and, if history is any guide, those groups will increasingly buy securities and housing, Capizzi argues.

Baby Boomers (born between 1946 and 1964) constitute 20.6% of the population, while Generation X (1965-1980) is not far behind at 19.6% and millennials (1981-1996) are ahead with 21.7%, according to Statista. Just coming into adulthood, Generation Z (1997-2012) is also a slightly larger cohort than Boomers.

Another factor is the ongoing influx of immigrants. “Immigration has always been one of the engines of growth,” says Luca Paolini, chief strategist at Pictet Asset Management.

It helps that immigrants often are younger than Americans born in this country, thus the newcomers are more likely to start businesses—and invest in securities and real estate. “One offset to an aging population could be increased immigration, especially of younger people,” notes Bob Jacksha, CIO at New Mexico Educational Retirement Board. But he adds that immigration lately is a fraught political topic, and so “the future of that factor is quite difficult to gauge.”

Immigrants often have more children than the native-born, according to the Center for Immigration Studies, and that’s a net-net advantage for the U.S. Thus, as Seamus Smyth, chief economist at Virtus Investment Partners, points out, “The U.S. has higher fertility and more immigration” than elsewhere in the West.

Demographics have the potential to affect different asset classes differently. Some of those changes are as follows:

Stocks

To Larry Kochard, co-CIO, Makena Capital Management, “Because people are living into their 90s,” they are more open to hanging onto stocks in later years. “Stocks give the best performance and are the best at countering inflation.”

Over the past five years, the S&P 500 has increased 73%, and in the past 12 months has climbed 28%. The Consumer Price Index was up 3.5% for the 12-month period. At the same time, foreign purchases of U.S. stocks have remained vigorous, although down a bit lately due to the strong dollar, which makes them more expensive than most overseas issues.

The aging of the population also presents opportunities for investors who are not in or close to retirement, as well as Boomers, obviously. Health care industry stocks, which rose 9% annually over the past five years, and artificial intelligence, up 6.3%, are good equity sectors to be in, said a report by Goldman Sachs Asset Management.

Health care stocks, of course, are propelled by an aging population—which uses more health care goods and services than do younger cohorts—and advances in medicine. AI companies benefit from the technology’s prospect of running much of the world in the future.

AI also could have profound workforce implications, as it could automate up to a quarter of all U.S. jobs by 2034, although ultimately this trend would boost economic growth by 0.4% due to greater efficiency, per another Goldman report. Meantime, services often used by older adults, such as assisted living facilities and travel, seem obvious investment choices as populations age.

In emerging markets, stocks show a lot of promise because EM populations are younger than in developed countries, which should help these economies grow, and provide a ready cohort to bid up share prices. For U.S. investors, places such as Turkey (its stock index doubled over the past 12 months) and India (up 22%) could be good places to invest, Goldman advised.

Goldman contended that up-and-coming EMs “offer attractive diversification opportunities for investors exposed to aging population dynamics,” meaning institutional investors in search of good returns should flock to them—something they have not done thus far. EM assets are just 5% of U.S. public pension plans, far down from the 11% weighting in the MSCI All Country World Index.

Market growth does have its limits for older investors, though. The problem is that many of the elderly have little money—10% of those 65-plus are below the poverty line—so stock-centric assets likely won’t end up being a boon for all older Americans.

Bonds

To Goldman, bonds will fluctuate as different cohorts grow older. In the U.S., the wave of Baby Boomer retirements indicates potentially higher long-term yields over the next 10 to15 years. And that is not good news for bond prices, which move in the opposite direction.

Reason: Fewer Boomers will be buying bonds, in coming years, as they already have enough. Once younger generations start purchasing bonds, they “could exert downward pressure on the 10-year Treasury yield by 2050,” Goldman projected. But then, “rates could rise again in the second half of the century as millennials retire.”

Housing

N. Gregory Mankiw, a Harvard economics professor, famously predicted in a 1989 paper that the giant Baby Boomer generation would inflate the housing market, and the converse would occur when they retired and sold their homes. Hence, housing would lose value.

For allocators that invest in housing via mortgage-backed securities, any downturn in value would not help MBS pricing. On the other hand, risks of MBS default remain low as government-sponsored agencies such as Fannie Mae issue almost all of those securities.

But a Boomer housing retreat is not what is taking place. A large majority of Boomers (78%) said they want to stay in their current homes, according to a recent survey by real estate brokerage Redfin. Says Virtus’ Smyth, “Mankiw was wrong.”

Why move? Home prices are very high, partly thanks to a supply constraint: Less housing got built after the shock of the global financial crisis, which was propelled by an over-supply of residential real estate, and by the debt used to buy it. The National Association of Home Builders/Wells Fargo Housing Market Index plunged from right before the 2008 crisis, then gradually recovered until the pandemic hit in 2020. Over the past four years, it is off about 40%.

Adding impetus for Boomers to stay where they are: rising mortgage rates, linked to the Federal Reserve’s tightening campaign starting in March 2022. The average 30-year mortgage rate has more than doubled since then, to 7.17%.

More broadly, the prospect of swelling retirement ranks has spurred questions about how society can pay for all the Boomers, whether via Social Security, whose trust fund is dwindling, or public pension plans, many of them underfunded. A lot of Americans have not saved enough for retirement.

One move aimed at easing this burden that has gotten a lot of attention: A suggestion from Larry Fink, CEO of BlackRock, that the official retirement age be increased, thus lessening the strain on Social Security. At the same time, such a move potentially would raise the age at which Americans must start drawing down their tax-deferred retirement accounts, giving them more time to expand their nest eggs. The implications for public pensions would be unclear, as their benefits often are mandated by law.

For allocators, today’s retirees and tomorrow’s, the stakes are immense. Demographics, the saying goes, is destiny. For investors, it’s a huge influence to watch.

Longer Life Expectancy Puts Pressure on Global Pension Systems

Tags: aging, baby boomers stocks, Bob Jacksha, Bonds, demographics, Goldman Sachs, Gregory Mankiw, Housing, Larry Kochard, Retirement

Joseph B. Fuller, a professor of management practice at Harvard Business School, anticipates that both employees and employers will share a common goal of embracing some type of employment for older workers.

“It’s very, very clear that we’re going to see an increase in the average working age,” says Fuller, who co-leads the school’s Managing the Future of Work project. “A major driver of it will be economic anxiety.”

Institutions that provide pension and retirement plans for their employees are already starting to rethink their offerings, with portfolio construction keeping an eye toward retirement sufficiency and security over periods that often include greater longevity. Within 401(k) plans, John Lowell, a partner with October Three Consulting based in Woodstock, Georgia, sees the addition of annuities and income products as part of the solution for some plan participants. But more broadly, he sees increased interest in the potential that market-return cash balance pension plans might provide, where individuals have an account that looks like a 401(k) account that can be converted to lifetime income.

“There is certainly a need for people to have the opportunity to generate lifetime income, particularly as lifetimes are getting longer,” he says. “It’s one of the places where as a country right now, we’re falling very short.”

The convergence of demographic and economic pressures is likely to squeeze both businesses and households as a surge of Baby Boomers hits the traditional retirement age of 65. More than four million Americans are projected to reach that milestone each year through 2027, according to the Alliance for Lifetime Income’s Retirement Income Institute. Yet many individuals feel unprepared. Reports show ongoing concern about a lack of savings with 66% of those turning 65 “worried about having enough money for retirement,” according to a recent survey sponsored by the Alliance.

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These financial realities may unite employers and employees in a common goal of finding ways to keep older workers on the job longer, Fuller expects. But the future of what work might become for older employees may look different than it does today. He pictures companies creating flexible hours and schedules and new programs that lean on pairing experienced employees with younger ones, he says. Fuller also sees a promising future for generative artificial intelligence to help support older workers, pointing to current research that shows a marked performance improvement when subpar employees are aided by generative AI and expects a similar gain could occur with older workers, he says.

Fuller also sees how reducing payroll taxes for workers over 65 years of age could encourage retired workers to return to some degree of employment and earning, helping ease pressures on social safety nets including Social Security. “The government should be hugely interested in getting people to defer retirement,” he says.

Insufficient savings for many Americans is a concern shared by Hal Hershfield, a professor of marketing and behavioral decision-making at UCLA’s Anderson School of Management.

“It may be outdated to expect that we can have a fully funded retirement for 30 something years while saving a minimal amount during our working years,” according Hershfield, in an interview conducted by email. “A more realistic picture of retirement may include working longer or working in some part-time way during what might be thought of as typical retirement years.”

At the same time, improving retirement plan design could also lead to more robust savings. Hershfield expects the need for even more widespread use of employer nudges, such as automatic enrollment and automatic escalation in retirement savings. He also recommends that companies help their workers reframe their retirement savings into smaller sums, including by linking savings to “temporal” amounts, such as dollars per day rather than dollars per month. Another technique that shows promise is adopting exercises like visualizations, that help workers connect to their future selves, “to help workers who want to save more, actually follow through,” he adds.

The longevity puzzle is yet another challenge individuals face today with many advisers and retirement planning programs running investment scenarios projecting a life expectancy of 100.

“The most important insurance we need is for living too long,” says Dan Ariely, a professor of psychology and behavioral economics at Duke University.

With increased longevity, the financial logic for companies to continue with defined benefit plans decreased, he says. Yet the stakes are high for most individuals who do not know if they need savings to support 30 years in retirement or for just a few years. Ariely sees a combination of several efforts as potentially helping ease this burden.

“As a country, we need to realize this is a very important thing and we need to create better retirement products—something like annuities but less expensive,” he says, adding that government backing could play a role, along with other innovations, in the retirement product space.

Individuals have a role to play, too, with people needing to “change dramatically how we think about saving for retirement and how much we spend,” Ariely says. Banks also can assist with helping people save automatically from their paychecks. And from a family and societal perspective, Ariely sees a benefit from fostering more inter-generational family connections. In instances where more grandparents are involved in their grandchildren’s child care, those children, when older, will be more likely to reciprocate with elder care for those same relatives at older ages.

“We need to do things on the personal front,” he says. “We need to start opening more savings accounts, we need to change the limits of 401(k)s or create additional alternative investments, and we need to improve the market for longevity insurance.”

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Maybe Baby Boomers Won’t Tank the Stock Market by Cashing Out

Tags: Alliance for Lifetime Income, Dan Ariely, Hal Hershfield, John Lowell, Joseph B. Fuller, longevity, October Three Consulting, Retirement