You’ve heard of the fiscal cliff that awaits us if the government doesn’t extend the Bush tax cuts and begins cutting government programs and the like.
But increasingly, investment “gurus” and research shops are warning of what I’ll call the “demographic cliff” that awaits those of us who invest in the stock market. The premise is that retiring baby boomers will increasingly trade their stocks for more stable assets like bonds, taking prices down in a rush. Some call this the “baby boom bust.”
The statistics, on the face of it, seem compelling. From 1946 to 1964, almost 80 million babies were born in the U.S., meaning that the first wave of boomers turned 65 in 2011. By the end of this year, approximately 7.2 million Americans will have hit 65. That number doubles in two years and will double again by the end of 2018. All those boomers hitting 65 and, presumably, handing in their office key cards and rolling over their 401(k)s could be a big weight on stocks.
Still, I’m not buying the gloom and doom. First off, the assumption that people with jobs will retire at 65 is based on old ideas about longevity, about work and about the government safety net. Improvements in medical care mean that a man who reaches the age of 65 has a 60% chance of living to 80 and a 40% chance of hitting 85. And that’s for someone turning 65 today.
I haven’t hit 65 just yet, but I can tell you that, fingers crossed, reasonably good health at 65 could mean I’ll be around for another 25 or even 30 years. Plus, there’s a good chance that when I hit 65, I’ll be in fine shape, thank you, and ready, willing and able to continue working.
As I said, life expectancies are rising rapidly. That means retirement is going to be increasingly costly. Oh, and if you’ve been listening to the debates over Social Security, Medicare and Medicaid, you probably know that the safety net has a few holes in it.
The best way to avoid going broke would be to simply work longer. And for many of us with desk jobs, that’s not so tough to do. Increasingly, the U.S. work force is working sitting down, not standing up or doing back-breaking farm chores. Yes, it’s true that our sedentary work-styles and lifestyles could mean greater health problems. That’s just one more reason to keep working, and keep earning that company-provided health insurance.
Also, factor in one more piece of news: Your dreams of an inheritance may not come true.
Mom and Dad are probably going to be using up a good chunk of their own savings as they live longer and returns on super-safe Treasury bonds are unable to keep up with the costs of a decent retirement.
Finally, our low-inflation environment isn’t going to last forever (nor will the low interest-rate environment). At some point, interest rates will be high enough that some investors may be able to live off the interest of a higher-yielding portfolio of bonds. But of course higher inflation will also cut into that yield and real returns (the inflation-adjusted return on your investment) may not be sufficient to support the lifestyle the baby-boomers desire, or expect.
I’m not going to dwell on the topic as the future has too many variables. (Or as Yogi Berra said, “The future ain’t what it used to be.”) But I will say that while the issue of the demographic cliff may gain traction as the baby boomers continue to surge past the magical age of 65, smart investors will realize that the only way they’ll be able to continue paying for their retirement will be to take a long view and continue investing in the stock market.