Where the Economy is Headed - A Different Perspective

For many years now, my father has told me to watch the baby boomers.  Look at what this large population segment wants and needs - invest in that, build a business model around that he would tell me.  Considering that individuals born between 1946-1964 number approximately 77 million, baby boomers account for practically 25% of the US population.  Indeed if you can find an idea that resonates with this group, your idea would pay off very handsomely.

Yet the reason I've been thinking about the baby boomers recently isn't because of some new investment idea.  Far from it, I keep coming back to the article Worthwhile From the Web: Thoughts on Retirement with Dignity 2.0.  A quick refresher:

Entitled Thoughts on Retirement with Dignity 2.0, the author reviews these baby boomers backgrounds, prospects for retirement, options in achieving retirement, and implications on the economy. Here's a preview: 

The 80th percentile 57 year old household income is little changed from 2 years ago (or 4 years ago, for that matter) and stands at $150,000. They have, on average, a $200,000 mortgage on a home valued in the low $300 thousands. (The value was $370,000 in 2007). If they have a 401K or IRA, the balance is approximately $100,000. ...

Only $100,000 saved? If you haven't read this article before, it gets better. Taking into account other assets and liabilities, this particular subset of baby boomers are $100,000 in the hole. After reading this short excerpt, I think what a baby boomer needs is a realistic retirement plan. Fortunately, the article lays out what is needed:

I came up with 3 primary actions that can be taken in order for these 57 year olds to retire comfortably, if taken together. All of them will have a potentially negative impact on the economy.
1. Postpone retirement to age 70 or older
2. Cut the household budget and save the difference
3. Liquidate debt by downsizing
...
They need to take the $115,000 in spending down to, say, $75,000. Talk about choking the horse. But it certainly can be done. That will facilitate $40,000 in annual savings, but what is really cool is that, after adapting to the pain of austerity and establishing a less expensive lifestyle, the savings goal drops to $1,080,000! 

Did you catch the most important point?  Here it is again: All of them will have a potentially negative impact on the economy.  Let's review a few potential consequences of these actions.

By postponing retirement to age 70 or older, I foresee an impact on college graduates because fewer jobs are available.  Without good jobs, these individuals will struggle to start their lives.  Indeed, how can we expect these individuals to buy a starter home when they're trying to pay off college loans from a minimum wage job?  Postponing retirement works for those baby boomers, but negatively impacts the next generation of workers.

Cutting the household budget and saving more leads to less growth, or worse, a contraction in the economy.  If there's less growth, that means less job opportunities.  In a contraction, layoffs may follow as companies strive to remain profitable.

Liquidating debt by downsizing their home is another option, but it comes during the largest housing slump since the Great Depression. Thanks to postponing retirement, baby boomers limit the number of starter home buyers in the market.  Additionally these buyers need a 20% downpayment in order to qualify for a mortgage.  Furthermore this leads to a dearth of move-up buyers who cannot buy until they sell their current home.  Finally with more foreclosures projected to come on to the market, home prices can best be expected to stagnate due to an increase in supply.

Looking at All Baby Boomers

Even though the above article zeros in on 80th percentile 57 year old baby boomer, the three actions apply to all baby boomers.  This made me wonder about the overall retirement readiness of this generation.  I found the 2012 Retirement Confidence Survey from the Employee Benefit Research Institute.

A few quotes from this report:

... nearly a third of older workers reported savings and investments of less than $10,000.  

Despite approaching retirement age, half of workers age 45 and older have not tried to calculate how much money they will need to have saved so that they can live comfortably in retirement. 

Workers of all ages appear to be planning to retire later, on average, than similarly aged workers were in 2002. In particular, the percentage planning to retire at age 66 or older has increased significantly for every age group.

The decline in confidence about having enough money to live comfortably in retirement is statistically significant across all age groups between 2001–2011.  

Workers age 55 and older are more likely than younger workers to be very confident that Social Security will continue to provide benefits of at least equal value to the benefits received by retirees today.

Peak Spending

I've been watching the stock market continue to rise since October wondering what does it see that I am missing.  I found myself questioning my own logic as I read reports of the growing economy.  However, I still believe that the headwinds that the US and world economy face are present.

Baby boomers are not ready for retirement. They need to curtail their spending and save more. Thus baby boomers are not going to aid economic recovery by going on a shopping spree.  Indeed Doug Short from Advisor Perspectives agrees in his article, Demographic Headwinds for Economy and Markets: The Decline of Peak Spenders.

Demographer Harry Dent was recently a featured guest on Bloomberg TV in an interview that was promoted with the frightening tease "S&P 500 to Fall 30-50% in 2012." The video clip is available at YouTube here.

The rationale for Dent's grim forecast is primarily based on the demographics of the peak spending years, an age cohort he refers to in the interview as ages 46 to 50. If we use the Census bureau five-year data groupings, the cohort in question is Age 45-49 (which is the range Dent normally refers to in his publications).

...

Let's study a graph of the Census Bureau historical and forecast data for the peak-spending cohort population in the US from 1980 to 2050.

With baby boomers now exiting their peak spending years, the economic ramifications are going to be felt for many years into the future. The Census Bureau doesn't see growth in peak spenders resuming until 2022.  When I read analysts saying that the US cannot experience a stagnant economy like Japan, I wonder why not.

I encourage you to click the link to the above article as there is a PDF file that provides the buying habits of different age groups.

Parting Thoughts

As it's getting late, I'm going to wrap up by saying it's tough sticking with a plan while the market is doing the exact opposite of said plan.  Still when analysts (like Goldman Sachs a few weeks ago) talk about this is the best time to buy stocks in 30 years, it's critical to look at the picture from every angle.  I think the economy can and will muddle through (to borrow a phrase from John Mauldin), but that's not the same as a legitimate secular bull market.

From the perspective of what baby boomers need and how it impacts the economy, caution is called for in today's markets.


Disclaimer: Please remember that I’m just a guy sharing information on a blog, and this is NOT official investment advice. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Please consult your investment adviser before making any investment decisions. During your conversation with said investment adviser, ask why they believe in their recommendation. If you are not convinced by their explanation, any action that you take or forego is also your responsibility. Just in case you missed that, you are responsible for your investments.

With that said, don’t let your investments keep you up at night. If they do keep you awake, you may be taking more risks than you are comfortable with. Talk to a professional about reallocating to less risky investments so that you can sleep. During your conversation with said professional, ask why they believe that their recommendation is less risky. If you are not convinced by their explanation, don’t invest. Remember:

1. It’s your nest egg.
2. Opportunities are easier to make up than losses.