This is the first in a series of blogs about the way that demographics are going to affect your investments.
Yes, I know there has been a lot written on the topic, and most of us know the basic theory.
The boomers poured a lot of money into the markets over the past couple of decades, and they made the markets go up. Now they are getting old (sorry if that term offends anyone, but the first wave of boomers is cashing in their pension checks as we speak) and they are going to be pulling the money out of their retirement accounts. This will make the markets go down.
Really? Is it as simple as that?
Well, yes and no. Let’s take it a bit at a time.
Today, let’s just start with looking at how people typically do invest over their life times.
There are lots of economic theories on lifecycle spending, saving and investing behavior but the basic theory is simple enough.
When you are in your 20s, you are worried about buying a house (or paying your rent) and maybe buying furniture. Once you get that under control, you save a bit more through your 40s and 50s, hopefully helped along with a hike in your earnings. By the time retirement is looming, in your 50s and early 60s, its all about padding the portfolio and saving for the day when you will not have an employment income. If you’re lucky, by that point you won’t have a mortgage, or any other significant debts either. Once you hit the retirement years, you start to draw down on those savings.
Broad generalizations I know, but they are not exactly off base.
That last little bit is the key. If households do indeed start to withdraw their savings post-65, then the aging-boomers-will-wreck-the-markets thing is a real threat. Question is, how much will they likely liquidate?
Let’s put some numbers to the amount of money that investors have in their portfolios at different points in their lives. We can start with the U.S., where the Federal Reserve conducts a ‘Survey of Consumer Finances’ every few years. The graph shows how thing stacked up as of 2007, the last year that the survey was done.
As of that year, for a family that had any financial assets (anything from a savings bond through to stock holdings or a retirement account, which was 94 percent of all families) the total median value of their holdings was $28,800 for all age groups. But that’s a bit misleading, given that there was a huge variation by age. For households with a head aged less than 35, the median holding was $6,800, while the median holding for those aged between 55 and 64, the median was $72,400. Median holdings of financial assets dip for households with a head aged over 65.
Overall, this seems to support the idea that people save and invest aggressively pre-retirement, then live off those assets after age 65. Although that is mostly true, there are a few other things to think about.
First, the group aged over 65 may have earned less all their lives, and correspondingly saved and invested less before their retirement years. It that’s true, then you would expect them to have lower holdings of financial assets in their later years than the group that is currently in their 50s.
Unfortunately, getting good data on this is more complicated than you might think. Ideally, you’d want to look at not just financial market holdings by age (how much do people have in stock portfolios at age 50, 60, 70 etc.), but also holdings by age for the same cohort of people. That is, you don’t just want to know how 50 and 60 year olds are investing this year, you want to know how the 60 year olds were investing 10 years ago—but we’ll leave that for another blog.
Second, it is not just the level of financial assets that matters, it is also the level of assets (including housing) relative to debt that affects behavior. That is, a household with a highly-valued, mortgage-free house is a lot less likely to pull out their savings from the markets than one with negative equity in their homes and maybe a mortgage too. Sadly, that describes a lot of U.S. households right now, so the pull-the-money-out to pay for retirement thing looks a bit more likely (more on that in another blog too).
Okay, let’s look at the Canadian data.
Interestingly, for Canadians who had financial assets, they had more at every age level than Americans. Having said that, the numbers are not calculated in exactly the same way so let’s not dwell on that. What is important is that the two graphs look pretty similar – people hold more in their stock portfolios in their 50s than they do in their retirement years. In the Canadian case, households aged 55 to 64 held $252,457 in financial assets (defined here as private pension assets plus other financial assets), while those aged 65 plus held $178,613.
What we know for sure: 55ish population held a lot of wealth as of mid-point of 10s, before they hit retirement.
So yes, this aging thing could be a problem for the markets.
Next Blog: A Nifty Demographic Index to