I was recently listening to an NPR segment covering the theory that baby boomers would be responsible for an inevitable market crash. The reasoning was that, as the baby boomer generation reaching the point of needing income, they will begin liquidating stocks in massive quantities. This theory definitely has holes for the following reasons:
1) The stock market has been increasing of late– Few people have the discipline to sell in an up market. If people think the good times will keep rolling, it will be hard to get them to dump stocks and go to cash or bonds.
2) Bond yields are not impressive– Record low interest rates have stuck around a lot longer than people have predicted. Giving up a 2-4% dividend yield at attractive tax rates to go to quality bonds at very low relative rates is a tough sell. Although inflation is non-threatening, that doesn’t mean that will stay that way. Rising rates may crush existing bond prices. Therefore, all valuation concerns aside, the stock market is looking attractive to the astute retiree.
3) People are living and working longer– The actual age that a retiree is totally dependent on retirement income is increasing. Between pensions and social security, many retirees are pushing off tapping IRA and 401(k) money. Therefore, their time horizon for those funds can tolerate more equity exposure.
For those retirees that don’t have the luxury of settling for low-rate bond returns to provide the capital they need to retire comfortably, they may be tempted to seek stock market-like returns to make up for lost time. This is the rock-and-hard place spot that requires a planner’s guidance. Don’t shoot for the fences with two strikes.