This morning the Wall Street Journal ran a story which showed that 2013 was the first year in decades that there was a net outflow from 401(k) plans. The immediate reaction by many was that this is just the start of a mass exodus from the markets by retiring baby boomers, which could have huge implications on the markets in the coming years as we patiently wait for Millennials to pick up the slack with their savings in the 2020s.
A few thoughts I had off the top of my head after reading this piece:
- It’s likely the majority of these outflows are just being rolled over into IRAs to simplify and aggregate retiree portfolios and not money being taken out of the markets completely. This trend will continue for a number of years.
- Something like 85% of the wealth in this country is held by 20% of the people. It’s not all going to come out at once and much of this wealth will be passed on to the next generation.
- This will be a drawn out process. Life expectancy continues to climb. Retirees will still need to invest a portion of their portfolios in stocks for growth.
- Although U.S. stocks make up half of the world’s market capitalization, you can’t think locally anymore in a world made up of global markets and economies. There will be plenty of foreign investors and opportunities in global markets in the coming years and decades. The U.S. was once an emerging market, too.
In his book Irrational Exuberance, Robert Shiller took a look at the data on this topic and came to the following conclusion:
If life-cycle savings patterns (the first effect) alone were to be the dominant force in the markets for savings vehicles, there would tend to be strong correlations in price behavior across alternative asset classes, and strong correlations over time between asset prices and demographics. When the most numerous generation feels they need to save, they would tend to bid up all savings vehicles: stocks, bonds, and real estate. When the most numerous generation feels they need to draw down their savings, their selling would tend to force down the prices of all these vehicles. But when one looks at long-term data on stocks, bonds, and real estate, one finds that there has in fact been relatively little relation between their real values.
Shiller doesn’t completely deny that there were effects from the baby boomer demographic wave, but he thinks the investing public’s perception of the demographic effects probably had more to do with the 80s and 90s bull market than the actual demographics behind it. In the markets, perception is often reality so I don’t think that you can completely ignore the demographic implications on the markets.
One of the things I’ve learned over the years is that demographics play a huge role in shaping the economic landscape from everything to the unemployment and labor force participation rates to the buying habits in the real estate market to economic growth (see Calculated Risk on why 2% growth is the new 4% growth for more on this). People are quick to blame or shower praise on politicians when it comes to the booms and busts we see in the economy. More often than not, the economic success or failure of those politicians has more to do with lucky timing in regards to where we happen to be in the economic (or demographic) cycle.
So while demographics does play a large role in shaping economic growth, it’s difficult to say how the mass exodus from the workforce by baby boomers is going to affect the financial markets. It probably comes down to investor behavior more than anything. It’s fairly easy for models to predict how the demographics will play out in the U.S. and abroad in the coming years. It’s not so easy to model out how investors will react to those changing demographic profiles.
Life Expectancy & Longevity Risk