How to solve demographic challenges

When the baby boomers retire in large numbers, they’ll need a flow of goods. To pay for them, retired boomers will have to sell financial assets including stocks. The baby bust generation is too small to support boomers. We may have to rely on emerging economies.

In Canada, the ‘baby boom’ generation was born between 1947 and 1966. The oldest members of this very large generation reached age 65 in 2012. Traditionally, this an age at which many people retire. At that point, many start to sell investments to finance their retirement. We wondered what impact the retirement of the boomers would have on stocks.

Initially, we expect little change. After all, while the oldest boomers may start to sell stocks, most of the boomers are still saving for retirement. The youngest boomers, who will turn 48 this year, will need to save for years to come.

We expect more retired boomers to focus on dividend-paying stocks. Particularly companies that raise their dividends each year, known as ‘dividend aristocrats’. After all, rising dividends can help retired boomers keep up with rising living costs. Dividend aristocrats can also help retirees earn share price gains over time. That’s because either the dividend yield will get higher and higher or, more likely, income-seeking investors will bid up the prices of the dividend aristocrats.

Retirees are usually net sellers of stocks

At some point, however, retired boomers will become net sellers of stocks. They’ll need to sell to buy a flow of goods and services. Considering this situation made us uneasy. With major medical advances, the lifespans of retirees keep getting longer and longer. As large number of boomers enter retirement, the demand for goods and services will jump.

We wondered who was going to provide enough of these goods and services? The fact is, boomers themselves had few children. How could a smaller generation of working-age Canadians support a growing number of retired boomers? We also wondered just who was going to buy the stocks retired boomers will need to sell in the years to come?

Professor Jeremy Siegel at the Wharton school of the University of Pennsylvania comes up with a potential answer. It’s in the fifth edition of his book Stocks for the Long Run. Professor Siegel writes, “The growth of the emerging economies has profound implications for developed countries [such as Canada]. First, many of the goods that will be demanded by the retirees in the developed world will be produced by workers in the emerging world. And the income earned from selling those goods will be used to increase not only the workers’ consumption but also their saving. Asians are naturally high savers; even rich and aged countries like Japan have national savings ratios of nearly 25 per cent…The growth in savings by investors in the emerging economies suggests that the financial markets in the developed world may not be overwhelmed by assets sold by aging boomers.”

Professor Siegel’s view is reassuring

If professor Siegel is right, there won’t necessarily be a shortfall. Workers in emerging economies can supply goods to retired boomers. This will give these workers the money to buy the boomers’ stocks.

Even if the outlook for stocks is better than we feared, it’s best to buy the right stocks. For now, stick with high-quality dividend aristocrats. And downplay those exciting low-quality growth stocks.  Many become over-priced and lead to subsequent poor returns. Also, growth is a poor replacement for dividends when it comes to paying your bills.


The Investment Reporter, MPL Communications Inc.
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