The baby boom retirement wave may not punish the stock market

The largest generation in U.S. history is getting ready to retire, prompting dire predictions of a stock market bust. Some market observers worry that baby boomers will sell off large amounts of financial assets to fund their retirements, while smaller generations that follow the boomers will not be able to purchase those assets. The scariest predictions say the sell-off will result in a market meltdown that pushes down stock prices and reduces the rate of return on the stock market.

Don’t sell your stocks yet, says the U.S. General Accountability Office. It studied the potential for a stock market bust when boomers retire and concluded it is not likely. “Retiring boomers are not likely to sell financial assets in such a way as to cause a sharp and sudden decline in financial asset prices,” the GAO said.

It is simplistic to think that boomers will have to sell all their investments in order to pay for retirement, the GAO said. That’s because most financial assets are held by the richest boomers, and they—like other rich retirees—will live mainly on the income from their investments. The wealthiest 10% of boomers own more than two-thirds of the $7.6 trillion held by boomers in stocks, bonds, mutual funds, IRAs, and other retirement savings. On average, the members of this group have $1.2 million in financial assets and $2 million in home equity and other investments. ” ‘Research’ indicates the wealthiest of these individuals tend to not sell their financial assets… instead, they choose to live from the income these assets generate,” the GAO said. Statistics on the wealthiest 10% of retirees from the generation preceding the boomers found that the majority actually had income greater than they needed and that they tended to add to, rather then spend from, their investment portfolios.

Those retirees who do spend down investments in retirement tend to do so very slowly. That tendency, plus the extended 18-year range of initial retirement dates for the baby boomers, along with expected longer life expectancies in retirement, will mitigate against any sudden reversals in the stock market. Some predictions claim the boomers will drive down stock prices because they will sell off risky assets as they approach and enter retirement and replace them with fixed income instruments. Studies of current retiree behavior refute that claim, the GAO says. Older retirees tend to hold onto their stock investments, it found.

The dire predictions about U.S. boomer retirement also ignore the new globalism in financial markets. While there may be fewer U.S. workers to buy stocks from retired boomers, the growth in younger generations in the rapidly modernizing Third World may provide a ready group of buyers, the GAO said. Also, studies have shown demographic factors have little influence on stock markets. The real drivers of stock prices are macroeconomic and financial factors, the GAO said.

Finally, the GAO warned that baby boomers have more financial wealth at risk in real estate and that they should worry more about declines in housing prices affecting their retirements than about stock market declines.