Courtesy of Doug Short.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
The recently released FRBSF Economic Letter on Boomer Retirement that was analyzed earlier today by Lance Roberts raises issues I have been thinking about for many years. Demographics is a major factor in market performance, proven to a large degree by the San Francisco Fed study. I had hoped that the echo boomers would come into the equity markets soon enough to forestall this, but the authors, using census forecasts, apparently have taken that into account. I would like to add a few comments regarding the study:
- There is another possible change on the horizon that might modify the study findings. Boomers may not be able to afford to retire, and the government may not be able to afford to let them. That seems to be the direction we are headed, meaning there could be several years of delayed retirement and/or older retirement ages for full Social Security benefits. Either of these will force boomers to stay in productive jobs for a few more years, potentially changing the study projection. Staying in productive jobs has a powerful affect because it not only delays the time that boomer assets start to be liquidated, but also working a few more years adds to GDP as well as aggregate savings. It would be interesting to see how sensitive the authors’ results are to shifts in retirement age.
- Another variable subject to change is immigration. If immigration rates are allowed to rise, this will reduce the M/O ratio changes forecast by the Census Bureau [note: M/O ratio = middle-age cohort, age 40?49, to the old-age cohort, age 60?69]. It is my hope that politicians will wake up and smell the opportunity, as I believe some have already done, to allow young, hard-working immigrants legal entry into the system. The trick here is to allow for legal immigration of young productive individuals and families, not illegal people looking to game the social systems.
- Boomer assets are going to be spent somewhere, so figuring out where that happens could greatly enhance one’s portfolio return. Healthcare, pharmaceuticals, leisure for the aging, retirement communities — these may be attractive areas for investing. Shorting areas likely to be hurt — possibly suburban housing, automotive, business attire — may also help. While an investment strategy of this sort will not affect the overall market P/E, it could still benefit the shrewd investor. It may be time to ditch the broadly diversified mutual funds, ETFs, and index funds, for more focused equity investments.
I would also like to add that I hope the authors are wrong because I need my equity investments to do better to afford my own retirement.
(c) Bruce Ollodart
American Actuarial LLC
