Vanguard has issued a report debunking notions that retiring baby boomers will hurt equity markets.
In “Baby Boomers and Equity Returns: Will a Boom in Retirees Lead to a Bust in Equity Returns,” the report’s authors contradict conventional thinking on the topic, saying that ownership of U.S. equities isn’t restricted to U.S. investors of a certain age. It is a global marketplace, they say, so assertions that the market revolves around one specific generation of people is short-sighted.
A 2006 analysis of the Standard & Poor’s 500 Index’s returns from 1948 through 2004 supports Vanguard’s position, pointing out that demographic variables generally accounted for less than 6 percent of stock market return variability — far less than macroeconomic, financial or other unexplained variables.
The industry has speculated for years that the strong U.S. economy and financial markets of the 1990s were spurred on by boomers, thus the assumption that their retirement will kill equity markets.
For its report, Vanguard examined data from the Federal Reserve System’s Survey of Consumer Finances to analyze the composition of boomer assets. The company also studied the relationship between an aging population and equity market returns in 45 countries.
“Ultimately, we conclude that multiple factors have contributed to what, in our view, are overblown fears of depressed equity prices due to the baby boomer retirement wave,” the authors said.
Boomers hold nearly half of the U.S. equity market, more than five times the 9 percent that is owned by 18- to 45-year-olds. Investors older than age 65 own the remaining 44 percent.
Vanguard does agree boomer will have a mild impact on equities because the generation spans 20 years. But it says any sales of equities will be gradual because not boomers are retiring at the same time. The first boomers began retiring in 2011, when they turned 65. Research has shown that retirees who are invested in traditional IRAs are unlikely to withdraw money from those IRAs before they reach age 70 1/2.