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Baby Boomer Switch

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April 07, 2011 – Comments (5)

Rosey had a great post on his outlook of how the aging baby boomers will affect the economy.

I have taken some very hard financial hits doing the supposedly "right" things.  When I critically looked at what had happened that some how doing what you are supposed to do to prepare yourself for financial security had not worked out that way, it came down to demographics, and I suppose bubbles.

So, I put a great deal of thought into how I thought the market would change and I came to similar conclusions.  The first baby boomers hit 65 this year and with that comes reduced income.  The very first place and biggest cut to "spending" would be savings.  So, the biggest hit from the reduced income is going to be less money being put into the stock market.  

At the other extreme, as these people start drawing pensions, the pension funds will not only have an increasing decline in contributions, but they will also be paying more and more.  So, maybe a new retiree figures they don't  have to touch their investment savings right away, but if they have pensions, investment savings are going to be hit by the increasing draw on pensions. 

Overall, as we get further into an aging population, we moving into a declining rate of increase of savings, and that is negative for stock prices.

Why are home prices in Detroit so cheap?  Because the population to buy those houses has been declining.  The population investing will be decling and population drawing will be increasing relative to each other.  That is a given.

Now, how it plays out, I have no idea, but I don't see where all the buyers come from for that increasing population of sellers and supply and demand suggests it isn't so great if you are selling.

5 Comments – Post Your Own

#1) On April 07, 2011 at 11:11 PM, amassafortune (29.41) wrote:

Another shift in plans is that long-term unemployed boomers will tap into Social Security at age 62, not later as planned. Along with this change of plans, more boomers will attempt to earn the maximum $14,160 that recipients can earn before penalty before they have reached their full retirement age, now 66 or higher for boomers.

Some unions have adopted the short-term decision to create a two-tier system, whereby new members pay into retirement funds at a higher rate, or with less generous pay and health care benefits. This is being done so more senior members will not have to make cuts. The problem is, fewer new members entering with lower compensation packages will not provide the long-term resources needed to keep old promises. As soon as new members reach critical mass in about 15 years, you can bet they will vote for changes in an attempt to make up for being second class members for half their careers. Members in one of these plans who retire at 55 can expect a fiscal haircut at about age 70. 

The results for boomers will not be all bad. Unexpected early retirement will mean many boomers will replace the daycare option for many grandchildren who now spend much time with non-family caregivers.

With the planned steady stream of investment returns no longer assured, boomers will pay down debt. That $20K financed new bass boat will be a used model paid for with cash. The second home may realized as a cabin. I don't expect the dreams to change much, just the cost.

Businesses are already adjusting. The transfer/concentration of wealth makes the marketing and sales plan easier for many corporations. Notice all the wealth commercials and print ads targeting accounts of a certain size. It'll be a tough sell, but these targeted approaches will whittle away at piles of cash that escaped the great recession relatively unscathed - their own livlihood depends upon it. 

Whenever you read or hear "generational wealth," understand they are talking about money they want to tap into for a generation, not leave to your grandchildren after growing for a generation.     

 

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#2) On April 08, 2011 at 12:24 AM, awallejr (83.83) wrote:

What you have been seeing is a decline in stock volume because the Boomer has been switching out of stocks and into bonds.  That is a normal process since people prefer the fixed income at older ages.

However, this could be the last boomer bubble depending on how inflation plays out over the years.

As for Detroit home prices dropping that is simply a case of no jobs in that city because they concentrated on narrow industry (autos).

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#3) On April 08, 2011 at 9:04 AM, dwot (69.85) wrote:

Here is another big player in the rise of the markets, the debt super cycle.  There is a very good interview with John Mauldin on the link.

 

http://finance.yahoo.com/blogs/daily-ticker/debt-binge-ending-middle-class-clobbered-20110405-094510-405.html

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#4) On April 08, 2011 at 10:02 AM, dwot (69.85) wrote:

amassafortune,

I suspect critical mass may be reached sooner then 15 years, depending on where the plan is coming from.  For example, in Oregon there were cuts to benefits for new members compared to existing members about 20 years ago already.  There has been a second stage of cuts for even newer members.

My SIL has been an elected official there for many years and that has given me insight to policy issues.  We have different perspectives on how we interpret things.  She says that employees have been paying the cost of their pensions since the tier 2 change 20 years ago, and with this newest change employees are getting short changed.  I'd have to look at how it is being paid for and verify that I agree with the position that pensions have been adequately funded for the tier 2 workers...

I had not really processed the lower compensation packages also mean lower contributions, so the weight of supporting the existing pensioners is even greater in magnitude.  I had processed that the younger generation had far less disposible income then the baby boomer generation and that they were being expected to make that lower level of compensation do far more, and they were being hit with a higher percent of income going to support benefits, but the misallocation of their contributions is actually leveraged.

One thing in Rosey's post that really irks me is  "It seems like the baby boomer generation is still on track to be an economic problem over the coming years because of their size and lack of wealth." 

Hands down the baby boomer generation has been afforded more opportunity, wealth and resources then any generation before or following them and far too many of them can't flippin' look after themselves!?!  And far too often they have the nerve to whine the younger generation wants everything handed to them on a silver platter, yet the younger generation has faced flat and declining wages or underemployment despite much higher levels of education, higher housing costs, higher education costs and on it goes.  I don't think there is an important economic factor in overall economic well being that favors younger generations, yet boomers had every last one of these in their favor.  Well, the early boomers had every last one of these in their favor.  There is a massive difference of wealth in early boomers compared to late boomers who followed the same economic plan of getting education, going for home ownership and saving for retirement.  Families that I know where there was say a 10 year age gap between offspring have massive differences in wealth.  The older ones have new cars every few years, very nice vacations, no mortgage and pensions that enable a lifestyle of extravagant vacations.  The younger boomers hope their 12-15 year old cars keep running, see carrying a mortgage until close to retirement, see themselves working past "normal" retirement age, take modest vacations and not every year, and will not have the option of down sizing their home as their home is already modest and worth half of what their sibbling's homes are worth.  That is the reality of what I would describe as the difference in opportunity to the highly motivated well educated between the beginning and end of the baby boomer generation.  

I have engineer friend in the latter group who was just making ends meet when the economic crash came and it slaughtered him.  There wasn't the opportunity to build resources to live through an economic down turn.  He already had a modest home, rarely took vacations, was driving an aged car and was not affording to put money into retirement savings...  He was close to losing everything when an aunt passed away and left him a fresh start.  Many younger people with families simply haven't been able to build any kind of savings to fall back on.

Certainly my perspective is from having lived in a very expensive city, where the housing situation has determined your overall financial well being.

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#5) On May 12, 2011 at 10:43 AM, mtf00l (45.13) wrote:

dwot,

I agree.  I'm a late boomer and resemble the late boomer you spoke of.  Thanks for pointing that out as many see "boomers" as all the same.

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