…We’ve now entered a pivotal phase in which, with each passing day, more and more of the country’s 50 million Baby Boomers are reaching retirement age…Over the last 35 years, we’ve seen what the largest and wealthiest generation can to do the markets when most of them are simultaneously buying – but we have no history for what happens to prices when so many people try to cash out so much for so long.
The comments above and below are excerpts from a lengthy article by Daniel Amerman (DanielAmerman.com) which has been edited ([ ]) and abridged (…) to provide a faster and easier read.
When we look to the future it begs a number of simple but essential questions:
- What happens when everyone sells, and not only sells, but takes their money out of the markets as it is received instead of reinvesting?
- What happens to prices and returns when tens of millions of Baby Boomers and their pension funds are simultaneously selling their investments? That is after all the whole idea of investing for retirement – eventually selling our investments, cashing out, and enjoying the proceeds in our golden years.
- What happens when the tax laws reverse what they encourage now, and force sales instead of buying? When Boomers in their 70s and 80s have to be spending down their portfolios instead of adding to them?
- What happens to prices when instead of cash, cash and more cash pouring into the markets – it is cash, cash and more cash being pulled out of the markets?
Words like “Boomer Bust”, “tidal wave”, “crash”, “battle” and “storm” have been used to describe what will happen to the markets and, [while] there is an element of truth to that “high drama” perspective, I’d argue that rather than a tsunami of some sort, a better analogy would be a gradual shift in the tide…[Why? Because] the Baby Boomer impact on the markets isn’t some hypothetical force to be reckoned with at some future point down the road – it is what has dominated the markets already for the last 35 years.
A rising tide of cash has lifted all the boats over the years, and shaped the way an entire generation looks at the markets, along with our expectations for returns. Whenever we look to returns, or prices, and consider what is reasonable to expect when it comes to future results, we tend to view it from within the framework of our personal experience over our lifetimes – which is that of cash steadily pouring into the markets for decades.
Now the tide is not yet actually receding, but we are nearing high tide, and the rate at which the tide of cash is coming into the markets is starting to slow. The Baby Boom is aging – those born in the 1940s are already retiring in large numbers, even as more and more of those born in the 1950s take early retirement – but the substantial majority of Baby Boomers are still in their peak earning years. Indeed, some are just now reaching those years – so the Baby Boom cash influx isn’t over with yet.
When the time does come that most Baby Boomers have retired and are starting to liquidate their retirement portfolios or draw down their pensions – or both – we are going to see five distinct but interrelated impacts on cash flow:
1) Their retirement plan investment cash is no longer going into the markets
2) Their earnings and profits are no longer being reinvested
3) Their employer’s pension plan is no longer buying investments for them
4) The associated pension earnings and profits are no longer being reinvested
5) Other investors have to come up with the cash to buy out their portfolio and pension investments, cash that will not be available for other investments.
For going on 35 years now, the above four factors have been building and pouring more cash into the markets each year, supporting them and steadily lifting prices, while smoothing out the rough areas – even as they increased the paper value of all those portfolios and pension plans. When the time comes for people to actually cash in on that value however, with their counting on prices much higher than today – the tide will be going out fast. How much will that lower the prices?
Now one could argue that millions of people have retired before and sold investments without crashing market prices. That is certainly true, and millions of people are currently drawing down investment portfolios in retirement right now. One could also say that even with the Baby Boom as large as it is, there will still be more people investing than divesting, thus more savers than people cashing out – and that would be true as well.
What’s crucial to take into account however is not simply people, but total cash in versus total cash out…What really matters with Social Security is the number of people paying into it, versus the number of people collecting benefits and, by the time the Baby Boomers have fully retired, we will be down to about two people paying in for each person collecting (according to Social Security Administration projections), which is the heart of the true problem facing Social Security.
While that ratio is widely acknowledged, what has generally been overlooked is that the exact same demographics will also be applying to retirement investing, pensions and the markets as a whole…
If we look at the long-term history of…rates of return, they are based on ratios such as what existed in 1950 when there were 16 workers for every one retiree. For stark comparison, by 2030 we will be down to about 2 people saving for retirement for every 1 person who is selling securities to fund their retirements.
Now there is of course more to the markets and investing than just retirement investing. Other retirement investors will not be your own sole source of cash, and inflation also needs to be taken into account. However, the shift in population demographics along with behavior, laws and perceptions that has led to about fifty million Baby Boomers becoming investors – has profoundly impacted the markets.
Financial markets feed and thrive on cash, and every month for decades the markets have been swelling with
- portfolio contributions,
- pension contributions,
- reinvestment of portfolio investment earnings and
- reinvestment of pension investment earnings.
These four supporting pillars of the market will first be neutralized, and will then reverse altogether, sucking cash out of the markets instead of adding back in.
The very powerful cumulative effect of these changes is necessarily negative on the prices that Baby Boomer investors will receive for their investments. Cash flowing into the markets and the demand for long term investments will be steadily falling even as a larger supply of investments is offered for sale each year, as the entire Baby Boom gradually retires and starts to cash in, as well as enjoy the hard-earned benefits of their pensions.
How negative will the effect be? Financial history would usually be a good place to look for answers, but unfortunately, history can’t offer guidance here. That is because none of this has ever happened before. In the not-too-distant past, most people were too poor to accrue any savings, and they died too soon to enjoy them anyway.
…We have never had 50 million people [Baby Boomers] expecting to be supported directly or indirectly through the ongoing sale of investments. Over the last 35 years, we’ve seen what the largest and wealthiest generation can to do the markets when most of them are simultaneously buying – but we have no history for what happens to prices when so many people try to cash out so much for so long.