The Impact of Baby Boomers' Retirement on the Stock Market

The baby boom generation refers to the 78 million babies born in the U.S. after World War II. In 2008 the oldest baby boomers reached retirement age and were eligible for Social Security benefits, according to the Congressional Budget Office’s 2009 “Will the Demand for Assets Fall When the Baby Boomers Retire?” by Marika Santoro. Economists caution that the stock market may experience a sharp drop in demand if this generation sells assets to fund retirement. Various factors may mitigate the impact of baby boomer retirement on equity market performance.

The Theory

The strong link between stock market performance and the U.S. population’s age distribution has been established by historical evidence, according to Federal Reserve Bank of San Francisco’s 2011 “Boomer Retirement: Headwinds for U.S. Equity” by Zheng Liu. The primary demographic trend is the retirement of the baby boom generation. As baby boomers transit from purchasing stocks to shedding their portfolios, especially high-risk equities, statistical models predict that this phenomenon may depress equity valuations. As they approach retirement, baby boomers buy income-oriented vehicles, such as dividend-paying stocks and bonds, to avoid market swings.

Financial Crisis Aftereffects

The value of the baby boomer generation’s retirement portfolios declined during the 2008 financial crisis. Some baby boomers faced loss of employment and problems with credit. The fallout from the financial crisis may motivate baby boomers to defer retirement and work into their late 60s or even 70s. These delays may lessen their need to sell off stocks to finance consumption during retirement.

Retirement Behavior

Given the increase in life spans, retirees exhibit more caution about liquidating stocks to meet living expenses. Baby boomers run the risk of outliving their retirement assets. They not only face uncertainty over the duration of their retirement but also contend with rising and unforeseen medical expenses. In general, retirees avoid spending down all of their assets and leave a considerable fraction of their wealth to bequests and other types of wealth transfer. These factors may counteract the anticipated drop in demand for equities due to baby boomers’ retirement.

Concentration of Wealth

One percent of the U.S. baby boomer population controls about one-third of that generation's assets, and the richest 10 percent of the population own more than two-thirds, according to a 2009 report from the Congressional Budget Office. Once retired, these wealthy individuals or households do not spend a significant portion of their assets on consumption, exhibit a low rate of dissaving and prefer to leave bequests. Meanwhile, poor households don’t have stock portfolios to sell upon retirement. Due to the concentration of wealth in the U.S., baby boomers’ retirement may not have an extremely negative effect on stock market performance.