3/7/2012 6:12 PM ET|
Boomers' big retirement problem
As members of this generation start tapping their portfolios, buyers will be harder to find. That means lower returns just as retirees need the money.
If you're a baby boomer, you've got a big problem when it comes to the investment returns you can expect in retirement: It's the sheer number of other boomers who are also getting ready to leave the workplace and rely on their portfolios to help pay the bills.
That's the depressing conclusion Robert D. Arnott, a portfolio manager, asset-management executive and inveterate researcher, has come to in more than 20 years of studying demographic trends and financial-market results.
The problem in a nutshell: The ratio of retirees to active workers in the U.S. will balloon. As retirees sell stocks and then bonds to support themselves, there will be fewer younger investors to buy those securities, keeping a lid on prices. Meanwhile, strong demand from boomers and a limited supply of workers will boost the prices of goods and services the boomers need.
Arnott is the founder and chairman of Research Affiliates in Newport Beach, Calif. He is well known in the fund world as the portfolio manager hired by Pacific Investment Management to run the Pimco All Asset (PASAX) and Pimco All Asset All Authority (PAUAX) funds, as well as for creating fundamental indexes that weight components by measures such as corporate earnings rather than stock market value.
At age 57, Arnott has a personal as well as professional interest in boomers.
WSJ: When you talk about a changing relationship between the numbers of retirees and workers in the U.S., how dramatic a shift from past decades are we looking at?
Arnott: This very year, for the first time in U.S. history, the population of senior citizens rises faster than the working-age population. Less than 10 years ago, when the baby boomers' kids were coming into the labor force and the very skimpy roster of Depression babies was retiring, we had 10 new additions to the working-age cadre for each one new senior citizen.
It goes to 10-to-1 in the opposite direction in 10 years. There will be 10 new senior citizens for each new working-age citizen. If that's not a political, economic and capital-markets game changer, I don't know what is.
WSJ: How does this changing mix of retirees and workers affect the investment returns that boomers can look forward to over the coming decades?
Arnott: Rates of returns are likely to be anemic and are likely to become more so for those who save later. I'm smack in the middle of the boomers. I was born in 1954. And by the time I reach 65 years old, the prospective forward-looking returns will have to be pretty skinny. That's by the end of this decade.
For U.S. stocks, the history of the last 100 years shows real (that is, inflation-adjusted) earnings and dividend growth of about 1.25% a year. Add that to the current dividend yield and you've got about 3.5% of real return. Add in inflation of, say, 2% or 2.5%, and you're looking at 5.5% or 6% (before inflation) a year.
Now with the interconnected influence of demography, debt and deficits, we're likely to see considerably slower economic growth than in past years. So I view stocks as having a forward-looking return of 5%, give or take, over the next 10 to 20 years.
If bonds are priced to give us, let's say, 2% to 4%, that means your balanced portfolio is likely to deliver 4%. Net of inflation and net of taxes, that's awfully close to zero real after-tax return.
WSJ: Is this payback for an earlier period when a bulge of working-age Americans helped push up investment returns?
Arnott: I never use the word payback. But the Japan stock bubble crested at the end of 1989; our bubble crested almost exactly 10 years later. Their demography is 10 years ahead of ours and worse than ours. The surge in mature workers, people in the 40-to-60-year range, is the sweet spot demographically for stock and bond returns. The surge in that population (in the U.S.) in the '80s and '90s helped to fuel the U.S. stock-market boom in the '80s and '90s, just as it helped to fuel Japan's boom 10 years earlier.
WSJ: Your prognosis for U.S. investors sounds in some ways too simple. And definitely too scary. In retirement, can't I sell my securities to workers in other countries? And won't other countries supply goods and services to boomers, taking some pressure off prices?
Arnott: Absolutely. But it is dangerous to overrely on that. What I'm painting isn't a doom-and-gloom scenario. What I'm painting is a scenario that is challenging, that's difficult. Compared with the '80s and '90s, it is awful. But the '80s and '90s were an extraordinary period.
You still have a lot of people expecting 8% or 10% a year from stocks or even from balanced portfolios. That's naive.
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Seen this all before, demographic risks. Although there is a grain of truth to the idea, if the US economy grows and it is seen as a relatively stable place to invest there will continue to be buyers. Withdrawals of boomer investments will be spread over 20-30 years so the change will not be that abrupt. When compared to other threats to our retirement plans like - inflation, healthcare costs, getting seriously ill, dying early, the unforeseen, us debt or the deterioration of the environment - this prediction is low on my list of worries.
BTW: The idea that Japan's woes are caused by it's aging population may be a fallacy and needs further justification; It could just as well be due to other things like the asset bubble they suffered and/or bad economic policies of their government. Correlation is not causation!
Question About Social security!!??
Where did all the money go when the population of the Baby Boomers was so high and the the retirees so low. Let me see, if you worked 45 years and there were so many Baby Boomers, don't you think there would be a SURPLUS of money to take care of this when they retire. HMM!!! No one ever brings this up, so "SHOW ME THE MONEY"!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
"Meanwhile, strong demand from boomers and a limited supply of workers will boost the prices of goods and services the boomers need". Strong demand for what? Healthcare sure. Housing not so sure, autos doubtful. The biggest issue isn't the people living off retirement Its those that have no retirement besides social security.
Today's common American jobs don't include pensions or health care anymore. People now, can only exist on these crap wages and cannot save anything for retirement. And that's if they can get to work with the coming 6 dollar a gallon gas. They will not "retire" .They will work until they drop.
When Social Security tanks and they have no way to buy expensive food, they will slit the throats of anyone who can keep them alive another day.
This is basically the scenario for every revolution that has ever happened in our world.
If you're a baby boomer, you've got a big problem when it comes to the investment returns you can expect in retirement.
That's a bunch of generalized crap. If you're a boomer and played your cards correctly you should have enough to retire and there are plenty of investments that pay the 4% you need to make it through retirement. But do not buy annuities, mutual funds or let investment advisers handle your money. Make investing your new occupation and learn how it works just like you did the other things that rewarded you.
So us Generation Xers, Yers, and Zers are supposed to feel sorry for Baby Boomers?
No way, if Boomers didn't save for their retirement and squandered it on too many cars, kids or grandiose houses than that's just too bad. The XYZ'ers don't owe us squat nor do we owe them squat. There's a whole lot of people that have given dearly for everyone's freedom to fail or succeed and that's all anyone should expect, the freedom to gain the rewards of their efforts. Good luck XYZ'ers, you'll learn that life isn't fair and it's much shorter than you ever thought.
Wa! Wa!Wa! Do I really want to hear it.
My mom and dad lived on one salary, raised two kids (one to college,me), bought a house, drove a car and - saved for retirement. My dad did not have a high school education and when he retired in '75 made a max of $15 per hr. But, he had a budget.
I raised 3 kids, bought a Duplex to live in, plus other RE investments and stocks and bonds. Drove nice used cars and saved for retirement. When i retired at age 55 I was making $40 K, car and expense acct. Went back to school and did HAVAC till 70. We had a budget and still do. We support our church, etc. and give well to our kids and grandkids. Clincher is I don't have to depend on SS.
My kids a different story. Made over $100K per year and.....spend it. Think I did not try to get them to invest for their future? Now in late 40's now what. Budget, what's that.
Gotta agree with Z. Wasn't bad enough that we as boomers were hit repeatedly with market crashes, we also took it on the chin when they let SS be up for grabs for the legislators to use without payback. Now we have a political party that wants to scrap the SS system, and medicare, for future generations. Apparently we're the problem even though we still hear of record corporate profits, the lowest tax rate on the 1% in our history, more record CEO pay, entitlements in the form of more subsidies and tax breaks to those better off all being paid for from an ever-increasing tax burden on the lower and middle income taxpayers, and all the while we hear this constant drivel about how the ship will sink if we ask the 1% to pay a fair share of taxes on the wealth they've earned from the entitlements we paid for.
Stop buying into their BS and vote out anyone that can't fix our economy without further burdening the 99%ers.
Where did the money go? As I explained earlier, Congress decided SSN was not a separate fund from the U.S. General Fund and spent it
The money isn't gone per se. The SSA Trust Funds balance, it is a separate fund, is about $2.6 trillion. However, the actual taxes were spent on everything including education, medicaid and wars and special US Treasury bonds were put into the fund. These bonds are redeemed whenever the SSA needs dollars to pay retiree benefits and the US Treasury most return the money and issue new US Bonds to borrow the cash from somebody. Unfortunately, since the Medicaid Trust Fund is running out of funds, bonds, the SSA has asked for permission to use SSA Retirement Funds to pay Medicaid which Congress should refuse since the SSA Trust Fund should not be used to cover Medicaid welfare. Once socialism starts it's almost impossible to stop.
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