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.
More from The Wall Street Journal:
VIDEO ON MSN MONEY
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.
Crazy8 - I believe you could transfer your lump sum to a self-directed IRA with a discount brokerage tax-free. However, be very conservative in your investments. You may have done OK with your picks so far, but don't get cocky. Stick with bonds or bond ETF's, and a blue-chip dividend ETF like SDY. And if possible, keep working.
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"!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Where did all the money go when the population of the Baby Boomers was so high and they were working? let me see, if you worked 45 years and there were so many Baby Boomers, don't you think while they were working 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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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