Baby Boomers Investment Returns Will Be Constrained
May 19, 2012 by MJP
Filed under Investing for Retirement
Will baby boomers cause our own investments to decline? According to one researcher, the answer is yes. There are so many of us that our collective retirement investing and spending plans are destined to negatively impact investment returns for everyone. How can this be?
The logic is relatively simple and in three connected parts:
First, as baby boomers retire in mass quantities (it’s already started), the ratio of U.S. retirees to active U.S. workers will explode upward.
Second, when baby boomers become retirees, we will begin to sell our mutual funds, stocks, and bonds to generate income to support ourselves. Unfortunately, there will be fewer non-boomer investors to buy what we are selling. According to the law of supply and demand, the prices we can get for our investments will be suppressed.
Third, boomers will still create a strong demand for goods and services but with a limited supply of workers to provide them, the prices of goods and services we need will increase.
I don’t like the sound of any of this but it is hard to argue with it. Therefore, the safe strategy is to be prepared for it. Make it part of your retirement plan. If the prediction is wrong, you will be that much better off.
Here is a link to the full article including an interview with the researcher.
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Any suggestion to plan ahead for this situation?
Thanks.
From one point of view, that is a dire prediction. I disagree. As the researcher points out in the same article, a retiree divesting his portfolio can sell assets to investors in other countries. The US financial system is not a closed loop. From an investor standpoint, it makes sense to diversify away from US stocks and bonds by buying foreign stocks and bonds. As long as you are not trying to hedge your currency exposure, investing in foreign assets actually reduces the risk of your overall portfolio. When you sell, the price will be determined by world wide demand for US assets, not by the number of US workers per retiree.
You’re right, boomers will create a strong demand for goods and services. The wealthiest sector of the population is in the 65-74 age group. However, the prices of those goods and services will be determined by the world wide supply of capital and labor. A high price would provide a signaling effect for more workers to emigrate to the US and for companies to invest more in the US.
I plan to stay invested in US and foreign stocks and bonds. I’ll adjust the mix to be consistent with my need for growth and income and for my tolerance for risk.