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Opinion: Why Baby Boomer Retirements Won’t Destroy The Stock Market

Opinion: Why baby boomer retirements won’t destroy the stock market

A number of people have asked for my thoughts on this blog post from Lightfield Capital about the potential for baby boomers to take down the stock market in the coming years from forced sales during retirement.

Here’s the gist of the argument from this well-reasoned post: a combination of rebalancing from stocks to bonds as people retire or approach retirement age and required minimum distributions from tax-deferred retirement accounts at age 70.5 will cause baby boomers to be huge sellers of stocks in the coming years, which bodes ill for stock-market returns.

This very well could be true. But allow me to take the other side and offer some possible reasons why the boomers won’t destroy the stock market in the coming years as they retire en masse.

People are woefully unprepared for retirement. You can’t go a week without reading multiple articles about how poor the state of retirement savings are in this country. These people are going to have to take more risk in their investments to make up for it. Whether or not this will work is another question, but my guess is lots of investors will be more overweighted in stocks than investors were in the past out of necessity. Add to this the fact that people are living longer and there should be a higher demand for stocks from retirees than in the past.

Household allocations to stocks aren’t that high. Stocks are still relatively low in terms of household asset allocations when you look at the data:

There’s no reason some of these sales won’t be from bonds instead of stocks. Plus I think the allocation to stocks has room to grow from current levels.

Investing has changed dramatically in recent decades. Financial advisers, robo advisers, ETFs, target-date retirement funds and auto enrollment have all made it far easier for investors to broadly diversify their portfolios. In the past, many investors would choose the safety of stable value funds or bond funds in retirement accounts, but the new focus on asset allocation means stocks are emphasized more than they were in the past.

RMDs won’t all happen at once. At age 70.5 you are forced to start drawing down your tax-deferred retirement accounts so the government can claim some tax revenue on those investments. But the amounts won’t be huge. Here’s the RMD table from the IRS that shows the minimum percentage of your account you have to take out each year:

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