Could the Market Fall Down and Go Boom?
There's a lot you can blame on the baby boomers, the sumo demographic that has given us everything from bell bottoms to those obnoxious "baby on board" signs. But will you be able to blame us for taking the market down when we start to cash out of our retirement plans?
Robert T. Kiyosaki, the incredibly successful author of "Rich Dad, Poor Dad" and a leading edge baby boomer himself, set up that scenario in a 2002 book, "Rich Dad's Prophecy," but since then other forecasters have found less cause for alarm.
Kiyosaki noted that the laws that created Individual Retirement Accounts and 401(k) plans require people to start taking withdrawals from these tax-favored accounts at age 70 1/2 , which is in 2016 for the leading edge of the baby boom. He predicted that dynamic combined with "millions of baby boomers needing money for medical expenses" could create a sell-off.
Kiyosaki said he is still worried about such a prospect today, but he lists it as only as one of many ills that he thinks could undermine financial markets. His current list includes the declining value of the dollar, followed by the cost of the war, the price of oil, the growing deficit and the fact that the dollar is no longer pegged to gold. "It's not the biggest thing. It's just a factor," he said of the concern that the baby boomers could start a market meltdown.
Kiyosaki isn't a markets guy. He prefers investing in real estate. "I'm not into equities. I have millions of shares of equities, but they're in my companies." But he's not the only one who has pondered what impact of the aging baby boom may have on the markets.
Still, other commentators and studies have concluded that a meltdown is far from certain.
"If we isolate ourselves to the U.S. -- or the U.S., Western Europe and Japan -- the future is not very happy for the baby boomers," said Wharton School finance professor Jeremy J. Siegel, author of "The Future for Investors." "There are not enough people who are workers and savers in coming years to absorb the literally trillions of assets that will have to be sold by the boomers to finance their retirement. That will mean lower prices for financial assets and real assets such as real estate."
But Siegel and others think the developing world, including rapidly growing China, could save us -- if we're willing to live with the transfer of assets from the developed countries to the developing world. A serious backlash -- a more profound version of the negative reaction when Dubai Ports World appeared poised to take over operations at major U.S. seaports or the Chinese National Offshore Oil Co. made a bid for the oil company Unocal -- could demolish that solution.
A report last summer by the Government Accountability Office, Congress's investigative agency, offered additional reasons not to stay awake nights worrying about a market meltdown. It analyzed current retirees' savings and investments and found that most current retirees are spending assets slowly or even continuing to invest in additional holdings. But since today's retirees are more likely than tomorrow's to have a monthly pension check coming in, previous performance may not be a reliable predictor of future outcomes.
More convincing to me was the fact that the GAO's analysis found that "the wealthiest 10 percent of boomers own about two-thirds of the financial assets held by this generation," excluding traditional pension plans. That means the people with all the money are . . . the people with all the money, and thus less pressured to sell assets. About a third of boomers (those born from the end of World War II to 1964) don't own any stocks or bonds or mutual funds at all.
The GAO also notes that the boomers will retire, not all at once, but over a 19-year span, which could soften the impact of any selling they might do and that many may work well beyond the traditional retirement age, continuing to accumulate assets. The GAO also suggests that many affluent boomers will want to leave something to little Madison or Jacob, so they won't be selling. Or they may want to hang on to stocks as a hedge against inflation. Of course, a falling market might undermine both of those motives.
Another counter to the market meltdown theory is that boomers may use their houses to finance retirement through such instruments as reverse mortgages, good idea or not. Houses are generally our biggest assets, not stocks and bonds.
For the most part, I felt reassured reading the GAO's report, though it did include a few troubling notes. For instance, although only 8 percent of the leading edge of baby boomers have long-term care insurance, recent projections show that 35 percent of people who now are 65 will use nursing home care. That's the point at which folks often are pressed to sell assets to qualify for government aid.
Kiyosaki's 2002 book was subtitled "Why the Biggest Stock Market Crash in History Is Still Coming," but he doesn't insist on his version of the future. "Everybody's opinion about the future is valid," he said. "The question is, what happens if they're wrong, and you bet their way."
A sobering thought, but not enough to make me sell.
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Correction: In last week's column on saving for college versus saving for retirement, I misstated the amount and years of savings when making a point about how it pays to save early. Assuming an 8 percent rate of return and that the savings begin on the first of the year, someone who puts aside $520 annually, not monthly, starting at age 22, will have $58,394 at age 50, compared with $17,035 accumulated by someone who waits till age 35.
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