A reader asks:
The “Relentless Offer” of the 401k has inflated stock prices and reduced volatility for years. As the population ages, target date funds replace stocks with bonds and people are forced to take RMDs. At what point does this selling frenzy drive down stock prices and turn into “Relentless Pleading” (or “Relentless Asking” if you prefer)? Or is wealth so overwhelming that this fact is too small to make a difference?
I’ve been getting some variation of this question for the last 10 years.
Theoretically it makes sense.
wrote about josh Relentless Offer In 2014. Here’s the main takeaway:
What this means for the character and behavior of the stock market is very important. This means that almost every week, no matter what, advisors from all walks of life have money to put to work and are increasingly agnostic about the news of the day. They all have the same actuarial tables in front of them and are aware that their customers are living longer than ever before; hence, an increasing portion of their managed accounts are allocated to stocks. And so they always buy and then buy more.
The combination of tax-deferred retirement plans, improved technology, lower costs and new default rules auto investment revolution. This is a fantastic step forward for investors, and baby boomers have been at the forefront of this trend.
And they are by far the richest generation in history because they have been buyers of financial assets for decades:
Baby boomers’ combined net worth is worth about $90 trillion, but it’s likely higher than that. The Silent Generation still controls $20 trillion in assets, and they are made up of people age 81 and older. Most of this money is being funneled to the Boomers, so they actually have close to $100 trillion.
Baby boomers and older own about 70% of the shares. They also control half of the housing market wealth.
They have been the biggest buyers of the stock for years. What happens when they turn into salesmen in retirement?
Between 40 and 50 million baby boomers are retired today. Why hasn’t the stock market crashed yet? Surely there has been some selling from RMDs and retirement needs?
I think the baby boomers’ fear of the market crashing is exaggerated for a few reasons.
1. Stock market wealth is concentrated. The top 10% control 87% of stocks, nearly 85% of private businesses, and almost 70% of total wealth.
Most of this wealth will not be spent, but will be passed on to future generations.
Yes, there will be some stock selling to fund retirement lifestyles in the coming years, but probably less than you think in the entire pie. And RMDs spent are money recycled back into the economy.
The fact that baby boomers continue to consume isn’t necessarily a bad thing for companies.
It is also true that this money will not be spent all at once but rather in a glide path.
2. Baby boomers still need to take risks in retirement. For a 65 year old couple 64% chance At least one of them will live into their 90s.
If you retire in your 60s, you may have 20-30 years to continue investing and maintain your standard. Retirees still need to take some risk to protect themselves from the inflation monster.
Stocks will continue to play a role in more retirement plans because many baby boomers will need to grow their portfolios.
3. Millennials are the balancing act of the Boomer generation. There are currently approximately 70 million baby boomers. This number is expected to decrease by approximately 16 million from now until 2035, and by another 24 million by 2045.
But there are also 73 million millennials who will reach their prime earning years as boomers begin to spend their portfolios and die out.
There are a lot rich old people But there are more young people who can step forward as buyers of their assets:
The largest population group this year is those aged 33 to 37.
Young people are investing in far greater numbers than baby boomers did at their age. If more inventory or homes are available, there are willing buyers.
The other thing to remember about demographics is that this topic is relatively simple from a planning perspective. This baby boom demographic gap is no surprise to market participants. The market already knows this is coming.
We had a long discussion about this question in the new episode of Ask the Compound:
Bill Sweet joins to answer questions about time management, student loan forgiveness programs, property taxes, starting your own business, and Ray Dalio’s dire market predictions.
Further Reading:
Rich Old People
