Baby Boomers

by Larry M. Elkin, CPA, CFP

4readers.com note: Many of us who wear reading glasses are Baby Boomers.  This essay is offered for your information.

Originally Published February 1996
Babes no longer but as influential as ever, the oldest Baby Boomers turn 50 this month. Soon the demographic herd will begin to lumber toward retirement. Financially, our options are to stay out of the way or be trampled in the rush.

Boomers have reshaped our economy ever since they took their first steps in those tiny shoes that their parents paid good money to bronze. In the 1950s we built suburbs to house them and schools to educate them. Boomers flooded college campuses in the 1960s, swamped the job market in the ’70s, launched a baby boom of their own in the ’80s, and became prime targets for corporate downsizing in the ’90s.

Despite their financial travails, Boomers are probably also largely responsible for the exceptional performance of the U.S. stock market during the past 14 years. This long rally, which has had only a few brief interruptions and no long-term setbacks, began just as many Boomers were beginning to climb the career ladder and earn serious money. Lacking company-funded pension plans that promised a fixed retirement income, Boomers have poured their assets (and, through profit sharing and 401(k) plans, their employers’ as well) into stocks and especially into mutual funds that buy stocks. This money has provided a wonderful base for the stock market expansion. While portfolio managers who worry about quarterly reports are inclined to panic at every market downdraft, individual investors like the Boomers have tended to ride out the storms for the simple reason that there is nowhere else to go.

In other words, what we have seen during the past decade and a half may be as much a structural stock market rally fueled by demographics as a financial rally supported by lower interest rates and greater competitiveness.

But what happens next?
Don't Pull The Rip Cord Yet. If my theory is correct, there should be a lot of life left in the stock market climb notwithstanding short-term corrections such as the recent technology swoon, or even major craters like the Crash of ’87. Such declines would only be temporary interruptions in the forward march. The reason lies in the makeup of the Baby Boom generation.

The Baby Boom was a demographic wave that washed over the nation between 1946 and 1964. Live births climbed from under 3 million in 1946 to the 4 million mark (never before achieved) in 1954, then stayed above 4 million for eleven straight years. After 1964, the United States never saw 4 million births in a single year until 1989, when many Boomers themselves were having children.

The peak year for boom births was 1957, which means that while the oldest Boomers now are 50, many are still in their 30s. Most of this generation will be saving and investing for its retirement for the next two decades, at least.

If we are in a structural stock market rally, then, we ought to be nowhere near the end of it. For the Boomer who knows that Social Security and the next generation will not be able to support him, the questions will be: If not stocks, what? If not now, when?

The situation gradually should begin to change around ten or twelve years from now. At first, the older Boomers will begin selling some of their holdings, but the sales will be absorbed rather easily by the larger number of younger Boomers who are still eagerly investing. Eventually, though, even the middle and younger-aged Boomers will want to liquidate some of their investments. Who can they sell to? The only options seem to be the much smaller and more financially pressed Generation X that grew up in the shadow of the boom, or the potentially larger and more promising market of investors from overseas.

When the Baby Boom becomes a net seller of investments (perhaps as early as 15 years from now, possibly not for 25 years or more) it will have to cast a wide net to find buyers. The alternative may be a structural bear market that could last throughout much of the second quarter of the 21st Century.

Turmoil In The Housing Market
Rising stock prices in the 1980s coincided with soaring housing prices, continuing a trend that got underway when the first ranks of Boomers entered the job market. This should have come as no surprise, since Boomers were establishing households (alone or as couples) at unprecedented rates.

The aging of the Boomers signals a reversal in the housing market as well, but it may not be nearly as delayed or as gradual as the change in the stock market. Within the next decade, we may see the beginning of a new mass migration as Boomers move primarily from North to South, seeking not only better weather but also the greater availability of low-stress, albeit lower-wage, jobs to supplement their retirement incomes. Home prices in affluent northern suburbs such as here in Westchester County may climb for a time during the next decade as younger Boomers trade up, but home values will come under relentless long-term pressure early in the next century.

Public schools will likewise feel the heat. Once their own children are educated, Boomers could form an overwhelming voting bloc against property tax increases that would be unavoidable if schools are not to be pinched by falling home values. The best hope for public schools may be the very tentative steps a few jurisdictions are presently taking to wean the schools from their reliance on property taxes.

In contrast to the widespread Northern gloom, some locales should see surging real estate markets. This will be especially true in the most attractive retirement destinations in the early years of the Baby Boom retirement (roughly ten to twenty years from now). The oldest Boomers, who are financially the best off, will snap up the best and cheapest retirement housing just as they initially drove up the price of Northern housing two decades ago. Younger Boomers and Generation Xers will find the market already picked over, once again.

This real estate rally could spread beyond the Sun Belt into other locales where financially wary Boomers believe they can find reasonable employment and a decent quality of life in retirement, which for many will be more like semi-retirement.

Coping With The Crowd
Since we know the wave of aging Boomers is coming, what can we do about it? Here are my ideas:

Don’t time the markets. While market timing is never a good idea, it makes especially little sense if the market has a strong upward bias. Remember, the youngest Boomers are only in their early 30s. This generation will continue to be heavy net buyers of equities for the next decade and beyond, before the tide ultimately turns. If you miss the ride now, there may not be an opportunity to catch up later.

Buy vacation property in retirement destinations. Should you choose a ski chalet in Colorado or a villa in the Virgin Islands? Head for the mountains if skiing is your passion, but first ask yourself where the 80 million Boomers are going to want to spend their golden years. Don’t look for a great resale market near the slopes a decade or two from now. On the other hand, they won't be making any more beach when all the Boomers decide to buy some.

Keep your skills up to date. Leave that rocking chair in the attic; Boomers won’t be needing it for retirement. With shrinking government resources, a low savings rate and longer life expectancies, Boomers will have to fend for themselves for a long, long time. They may quit the rat race for something less stressful, but they’ll probably work for most if not all of their lives. Better stay on top of some field you enjoy, unless you plan to make flipping burgers your hobby.

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