How will Baby Boomers' retirement affect stocks?

Updated 19m ago
By John Waggoner, USA TODAY

Next year, the first of the 79 million Baby Boomers will hit 65 — retirement age.

Given the stock market's dismal returns the past decade, few will have as much saved for retirement as they had planned. The past three months alone, the average stock mutual fund has shrunk by 10%, according to Lipper, which tracks the funds. The past 10 years, the average stock fund has gained an average 0.2% — far below the stock market's average annual gain of 9.7% since 1926.

A good decade in the market often follows a bad one. But the big question: If Boomers follow the usual pattern of shifting their portfolio mix toward income-generating investments — bank CDs, bonds and dividend-paying stocks — will the stock market's long dry spell drag on?

Possibly. But the change could be over such a long period that other events — wars, deficits, or just the trauma of this decade's wretched returns — could be far more important. "Demographics, while 100% predictable, move at glacial speeds," says Robert Doll, chief investment officer at BlackRock. "There are all sorts of things that can overwhelm it."

The Baby Boom began in 1946 and stretched through 1964. The mutual fund industry has grown up with Boomers. In 1971, when the first Boomers turned 25 and began to enter the workforce, the fund industry had $55 billion in assets. It's now a $10.7 trillion behemoth, $4.1 trillion of which is in retirement accounts, according to the Investment Company Institute, the funds' trade group. About 42% of mutual fund IRA money is invested in U.S. stock funds, as are 46% of assets in mutual fund defined-contribution plans such as 401(k)s.


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And over the next 20 to 30 years, that money will be making its way back to the Boomers as they tap it for their retirement. Most Boomers, and especially younger Boomers, will need every bit of the money they have saved. Not only are they unlikely to have a pension from their former workplaces, they also are likely to live longer than their parents. In 1970, the average life expectancy was 70.5 years, vs. 77.9 years in 2007, according to the Centers for Disease Control and Prevention. "They're living longer and working longer, and demands on those funds are higher than they would have been for people the same age 20 to 30 years ago," says Jim Stack, president of InvesTech Research in Whitefish, Mont.

The notion that Boomers will shift their assets to more conservative assets in retirement seems like a layup. Classic portfolio theory holds that you should shift your holdings to income-oriented investments the closer you get to retirement age. After all, when you retire, your own income ends, and you become reliant on Social Security, pensions and your investments to pay your bills. Income-producing investments also tend to be less volatile than growth stocks — and you can't make up stock market losses with your paycheck when you're retired.

Already, the fund industry has rolled out products to cater to retiring Boomers, and those products, too, will push their shareholders into more conservative investments over time. The most popular retirement funds, target-date funds, move money from stocks to bonds according to your retirement date: As retirement approaches, the funds' investments shift toward bonds and away from stocks. The funds have seen their assets swell to $260 billion, up from $9 billion a decade ago, despite recent woes: During the bear market, some investors were shocked at the large amount of stocks in their target funds' portfolios. The Securities and Exchange Commission has rolled out new rules for the funds that mandate more disclosure.

Another innovation: managed distribution funds, which set a fixed distribution each year. Although these funds have some exposure to stocks, they have a big slug of bonds and cash, too.

But the most popular withdrawal plan remains the oldest: the systematic withdrawal plan. You tell your fund how much to cash out and send you each month — either a fixed amount or a percentage of your account. In all three arrangements — target-date funds, managed distribution funds and systematic withdrawal plans — money moves out of stocks and into more conservative investments.

More than demographics

But the notion that the Boomers' retirement will be the bane of the stock market probably doesn't wash. For one thing, many have already diversified into bonds, real estate and commodities, and that has shielded them from some of the damage of the last decade's bear markets.

Jerry Heit, 63, works part time as a pharmacist in Salem, Ore., and plans to retire at 66. "I haven't had to defer retirement because of losses in the stock market," Heit says. "My asset allocation was well diversified, so I was able to recover my losses in the 2009 market rebound."

Not all Boomers plan to spend all their retirement money. "The affluent — those with $250,000 or more — aren't following the life-cycle approach to investing," says Fran Kinniry, principal at the Vanguard Investment Strategy Group in Valley Forge, Pa. They are more concerned with passing wealth to the next generation — in which case, they lean toward stocks because they have a longer-term outlook than those who must start withdrawing.

Any movement the Boomers make will be gradual at best. "You don't turn 65 ... and move all your money into bonds," says BlackRock's Doll. Life expectancies have increased, so a retiree can expect to live another 30 years, and that's a long enough time to keep a portion of your portfolio in stocks, even at 65.

The move to bonds and cash might be slowed even more by current low interest rates. The average money market mutual fund yields just 0.03%, or $3 for every $10,000 invested. A 10-year Treasury note yields less than 3%. "I think it's a mistake to think that retirees are going to withdraw from equities and put their money in ultralow-yielding bank CDs or bonds, particularly when yields are at generational lows," says InvesTech's Stack.

What may prompt the Boomers to move from stocks to bonds and bank CDs, however, are the soul-searing bear markets that characterized the start of this century. The 2000-02 bear market was the worst since the Great Depression— at least until the bear market of 2007-09. Technology funds, the darling of the 1990s, have lost an average 8.8% a year for a decade. Real estate funds, which soared in the middle of the decade, have lost an average 17.1% a year for the past three years.

Bear markets aren't the only things that may have soured Boomers on the market. All the revelations of fraud on Wall Street have had a cumulative effect on people, says Jim Floyd, senior analyst for the Leuthold Group, an institutional research group in Minneapolis. "It used to be a negative when we said we were from the Midwest," Floyd says. "Now it's a plus to say we're not on Wall Street."

Floyd also thinks that the world is in such an uncertain time that Boomers — and practically everyone else — simply became more risk-averse. Oil spills, volcanic eruptions and hurricanes all make the world seem far less certain than when the Boomers were in their 30s and 40s. "People want to pull back on risk because they're uncertain about any outcome," Floyd says.

No matter what the Boomers do, their pull on the stock market may already be waning. The Boomers, after all, had children, too: the so-called Generation Y, those born in 1983 through 2001. At 79.9 million, they're a bigger generation than the Boomers, and they have even greater incentive to save: They are far less likely than their parents to have a pension and may well see a much longer wait before they're eligible for Social Security. They, too, will need to invest in the stock market.

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