I’ve noted before that the baby boomer generation can and will have a significant impact on the stock market. It already has, and I will blog about that some other day.
The question today, however, is CAN the boomers really have an impact. I could go through economic models and simulations, or historical data and trends to show it to you, but I leave that for the book “The Coming Crash: How a House of Cards Will Fall as We Pull Out the Foundation.”
However, there is a simple way to see that there will be an effect: consider the raw SIZE of the baby boom generation. Boomers consistent of 80 million people in our population.
In this day and age where we throw around the words millions, billions, and trillions, but rarely if ever actually count up past twenty ourselves, what is 80 million?
There are lots of ways to understand what 80 million is, but to see the impact on the stock market, consider the following:
The population of the cities of: New York , Los Angeles, Chicago, Houston, Philadelphia, Pheonix, San Diego, Dallas, San Antonio, Detroit, San Jose, Indianapolis, San Francisco, Jacksonville, Columbus, Austin, Baltimore, Memphis, Milwaukee, Boston, and Washington combined is only about 30 million – less than half the total baby boomers. Why these cities? They are the 20 most populous cities in the entire United States according to the 2000 Census!
In other words, the 20 largest U.S. cities would only account for less than half the baby boomers!
Imagine what would happen if all the people in the 20 largest U.S. cities took their money out of the stock market, and then took out money for someone else too.
The thought is staggering. The effect is large. Detailed computer simulations combined with historical data show it is inevitable, as the tidal wave of retirees hits. The only question is how to best prepare yourself.
15 March, 2007 at 5:40 pm
Hi Steve,
Back atcha …
It’s an interesting hypothesis, but where will the money go?
Won’t a lot of it be inherited (including the money “trapped” in fully paid houses) and simply go back into the market or the economy?
Cheers,
George
15 March, 2007 at 9:25 pm
Good questions!
I will make the answers to both the subject of upcoming blogs, with more detail.
However, as for inheritances, one thing that comes of out the modeling is that as far as the market is concerned, death is almost a good thing, because it gets the boomers through their withdrawl years much quicker. (I know it sounds horrible to say it that way, but it is true nonetheless.)
Best,
Steve
1 April, 2007 at 8:26 pm
Hi Steve.
You raise some interesting points. In addition to the money, where will THEY/WE go is another consideration? The infrastructure and real estate in Florida, Palm Desert and the Southwest states can only handle a certain number of people. As morbid as it seems, it sounds like investments in casket makers and funeral homes is the next long-term wave!
A partial follow-up to allocator’s point: How many of these people without relatives will donate their estates to philanthropic or other worthwhile organizations and charities if not even seeing the government benefit from probate in many cases?
2 April, 2007 at 2:15 pm
Richard,
Good comments. Infrastructure, and housing, will certainly be an issue. Of course, supply and demand will probably be the deciding factor. In my modeling, it appears that even after cashing in on their stocks, many of the boomers will be under-funded for retirement. As a result, they won’t as a group be able to afford to pay top dollar for those swanky sunny vacation villas on the coasts. I make no predictions about this, but wouldn’t be surprised if retirees either moved out of country (say Mexico) or to depressed areas (say Michigan, Ohio, West Virginia, Pennsylvania).
The donation question is a good one. It will be interesting to see how people deal with their estates. And, for those that are donated, how quickly those estates are liquidated. It turns out that the details of estate liquidation are not dominant effects, since a good deal of the total investments are withdrawn while the retirees are still alive.
In fact, I studied the effect of varying estate taxes which mimic this result. It turned out that the effect was roughly equal to the effect of the capital gains tax — namely that it could effect the total market valuation by 10’s of percent over the long term — much less than the approximately 1000% effect of the retiring boomers.
Finally, on funeral homes, you might be on the mark. We aren’t making any more land, but people keep on expiring.