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Author: Ceberon Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75897  
Subject: The power of demographics. Date: 11/3/2004 3:33 PM
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I was talking to my parents about how much my wife and I had been saving in our 401k's, ROTH's, etc. My parents said that as soon as my sisters get out of college they'll be able to save for retirement too. As my dad is a lawyer and makes piles of money, I'm not incredibly worried about them, but it's a bit sad to know how much they've made and that they still have almost no savings. They're at the slightly older end of the baby boomers, low 50's.

I also made sure to mention at a wedding recently when talking to a bunch of relatives that we were already saving for retirement, and hoped to do it in around 15-20 years, depending on how expensive our kids end up being. From what I am hearing it sounds like almost all of the people that were around my parents age were "just starting" their investments for retirement, and were hoping to be able to put enough into their accounts to live on that, pensions, and social security.

I'd heard a lot about how the demographics shift in the US will change the stock market, and I'm just beginning to understand how this will happen, at least from my own personal experience.

First, around 1990 when the stock market started going up, this was partially due to the increases in earnings being reported (plus the promises of new technologies of course). Looking at it from the demographics point of view, you could imagine that many boomer families had children in highschool / college at that point in time. High-school and college kids are expensive. Take a look at this image I found:

http://www.cbo.gov/docimages/486303.gif

You can see the sharp decline in the savings rate around 1990. I believe that was the highschool / college effect. Spending went up, savings went down.

All of the baby boomers (such as my parents) will realize that they have 10-15 years left before retirement. They will begin saving a lot (especially now that their children are getting out of the house, and graduating from college). They're at the peak of their incomes and a large portion of that income is going to go into the stock market. Since they will likely be buying less, I have to assume that earnings for companies will not grow nearly as fast as it did when all these people were spending like mad.

So my parents will stop buying new DVD's, game systems, vacations, stylish clothing, etc. They will instead be buying many mutual funds.

Therefore, with the influx of money into the market and what I would assume to be mediocre earnings growth, the PE ratio's of the stocks will rise to obscene levels. However, once we hit around 2010, the influx will begin to slow down. People will begin retiring at age 65 I assume, hoping for social security and pensions to tide them over, plus their investments will likely have risen due to the influx of a greatly increased savings rate. Sometime in 2010 and 2020, more and more boomers will be retiring. While they may not sell off all their stocks, for the most part they will stop investing in new stocks.

With my magic ball working so well, I will assume that sometime around 2015 or earlier, the stock market will begin falling. Retired (or soon to be retiring) boomers will decide that the stock market isn't a good place to keep their retirement funds any longer, and will pull them out for fixed income assets. This will pull the market down further, and we'll have a nice strong crash on our hands. Of course this will be a nice buying point for those of us still working.

Few things that might make my guesses here completely wrong from my point of view:

1. Everyone knows about the boomer generation, so instead of the long run-up, we might have stagnation for 10 years and then a slight fall off as the boomers start selling stocks. In either case, it will still be a good buying point, just less exciting of a fall.

2. My parents and others have mentioned that they're going to start saving quickly now, and "hope" to be able to retire around the age of 65. I've gotten the impression from many conversations that many people in that generation might end up working past 65 in order to save up extra. So the 65 year old cut off point may be pushed back for awhile as those in white-collar positions can keep working past their normal retirement age.

3. Watching the boomers forced to save heavily for retirement, many out of college may take a clue from their parents and begin saving, holding up the market a little when the boomers stop their saving.. although this is just being a bit optimistic that people could actually learn.

What this means to me at least:

I would look at investing in brokerage houses. I have to believe that most boomers are about as clueless about investing as my parents are, and many / most of them will go talk to a brokerage house (who will rip them off). If I'm right about the increased savings over the next 10-15 years, then the brokerage houses should benefit

If we don't see a slow decline in stock prices over the next 10 years, I'll make sure to lower my stock allocation heading towards the boomer retirement years. I can't imagine any situation in which the stock market would go up when people start retiring.

For the crash years, I'm thinking golf equipment should hold up, along with cruise lines, warm real estate (Florida, Arizona), and air lines (Although there might be a drop off in business travel, I assume visiting family and vacations may increase the number of passengers?). I assume a lot of retirees will be interested in spending a bit of money right out of retirement, even if they'll have to cut back a lot later.

Anyway, I could be way off, and I know some of this is covered in books out there, but I thought it would be an interesting discussion.
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