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Why baby boomers won't bust the market

November 13, 2013

To hear the alarmists talk about it, you'd think the baby boomers are going to wreck the stock market when they retire. The reality, from Vanguard's perspective, will probably be much less dramatic.

For years, financial pundits have warned that the baby boom generation—the 75 million or so* Americans born between 1946 and 1964—would create a major drag on the stock market as they move into retirement. The oldest boomers turned 65 in 2011, and the AARP estimates that around 8,000 of them are reaching that age every day. And just as the boomers' retirement savings helped drive up equity returns in the 1990s, the concern is that withdrawals from their IRAs and their 401(k)s will cause a steady drain on stocks in the near future. After all, money invested by baby boomers added up to almost 47% of all equity assets counted in a 2010 survey by the Federal Reserve System.

We found no credible evidence that these demographic shifts will negatively affect future equity performance. The boomers weren't all born at the same time, and they won't retire at the same time, either.

PDF Download the research paper »

However, a newly released Vanguard research paper largely debunks the idea that boomers will be responsible for a market debacle.

Although striking demographic changes are already occurring as the baby boom turns into a retirement boom, our analysts found no credible evidence that these shifts will negatively affect future equity performance.

Easing into retirement

The boomers weren't all born at the same time, and they won't retire at the same time, either. Some already retired years ago, and some will still be working well into the 2030s and beyond. That means any retirement-induced equity selloff would likely be gradual.

And while it's true that America's population (like that of many other countries) is aging, the Census Bureau projects that people between the ages of 15 and 64 will still represent the vast bulk of the U.S. population for decades to come. In short, long after most of the baby boomers have retired, an enormous cohort of Americans will still be working, paying taxes, and investing.

What goes around comes around

Vanguard's analysis offers several other reasons for optimism. For example, although the baby boom generation does own a major share of the U.S. equity market, Vanguard believes that has less to do with some unique generational affinity for stocks than with a traditional tendency for people to favor stocks during their prime earning years.

As noted above, in 2010 baby boomers held almost 47% of all equity assets counted in a Federal Reserve study. But looking back to 1992—when the boomers were still mainly in their 30s and 40s—they owned just 8.4% of the market, while people who at that time were in the 46–64 bracket (and who today are mostly retired) owned 45.8%.

In other words, there's reason to expect that as today's younger workers (those currently aged 18–45) move up in years, they, like the baby boomers before them, will gradually increase their footprint in the stock market. Dollars that disappear from the market as boomers draw down their assets could very well be replaced by dollars invested by today's Generation Xers and millenials.

Other findings from Vanguard's research:

  • Stock ownership among baby boomers is concentrated among that generation's wealthiest members. The top 5% (in terms of net worth) own 77% of all equities owned by the entire boomer generation.
  • Thanks to globalization, more and more overseas investors are buying into U.S. markets. In other words, the strength of the U.S. equity market no longer depends as much on the support of U.S. investors as in the past.
  • Quantitative analysis finds no clear, consistent statistical relationship between U.S. stock returns and the percentage of the population over age 65. This was also true in a broader set of countries our analysts assessed.

Get the whole picture

Vanguard's new research paper takes an in-depth look at these and other aspects of baby boomers' investment habits—and their likely impact on stock market returns over the next few decades.

The bottom line: Although the cresting wave of boomer retirements may receive much attention from the media and popular culture, Vanguard believes investors would be well served to ignore claims of a relationship between this demographic shift and future investment performance. We recommend that investors avoid making hasty changes in their long-term strategic asset allocation in response to baby boomers’ retirement.

Download the full research paper » PDF

* Source: Social Security Administration.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Past performance is not a guarantee of future results.
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