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Baby Boomers Rest Uneasy - What's Retirement Like When Their Favorite Stocks Are Blown to Bits?
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(Jan. 23, 2001) The year 2000 saw trillions of dollars of market value disappear in stocks such as Microsoft, Intel, Cisco, Amazon, Dell, Home Depot, Qualcomm, IBM, AT&T, etc., and in most tech and growth mutual funds. Not to mention the dot-com stocks that simply fell off the edge of the earth. It seems that everyone's favorite 'great story' stocks have been cut to ribbons. Now what?
The Post-WWII Baby Boomer generation is rapidly approaching retirement age, yet over the past few months many of their nest eggs have taken some nasty hits. Many Boomer's hopes of a comfortable retirement, bolstered by income and capital gains from healthy stock portfolios, while not exactly ended, have at least been downscaled as the stock market has started to show its vulnerable side.

Boomers had come to take for granted the fantastic gains in equities we've seen since 1982. Their bull-market expectations of regular increases in that wealth had made them feel richer than they really are - the 'wealth effect.'

In an article on the Tocqueville.com website, entitled "Vicious Circle? IPOs and The Real Economy," Norman Getner writes:

"An intriguing theory, advanced by Stephen Roach, of Morgan Stanley Dean Witter, is that the wealth effect might become more asymmetrical, with the stock market hurting the economy more when it drops than it helps it when it rose."

"The reason would be that, with baby boomers increasingly close to retirement, “a large portion of the US population is more dependent than ever on wealth preservation to support lifestyles in the not-so-distant future.”"

"In addition, the spectacular growth of pension schemes funded on a defined contribution, rather than on a defined benefit basis, implies active management of household portfolios and the need to cushion investment shocks through tactical adjustments of saving and spending. “A sharp correction in the stock market in this context could hurt the economy a lot more than a traditional wealth-effect calculation might otherwise imply.”"

Which leads us to wonder - are Gen X and Y going to support the huge number of Boomers in their retirement, in the style to which the boomers are accustomed? Boomers think they have it made - in dollar-denominated assets, of course. But it seems that economic events will inevitably even things out, and X-ers and Y-ers wouldn't then have to carry bags, cook, clean, and care for the aging Boomers who think that they've…got it made.

Riddle me this - why should Baby Boomers prosper once they no longer run things? They'll be old, certainly less useful, and could be rendered powerless by a combination of inflation and a lousy stock market. And our economy is certainly overdue on seeing both of those factors lately.

Economies evolve for a reason. Markets change, not arbitrarily, but for fundamental causes. Should we believe that the hopes and wishes of the Boomers are powerful enough to sustain the economy in the way that may suit the Boomrers best? Probably not, because the vital presence of Gen-X and Gen-Y means other forces will be at work, and …stuff happens.

After all, what entitles Boomers to live their declining years in luxury? Their hard work? (you call that work?) Their careful investments?(what, buying stocks and waiting is some kind of genius stewardship?) The assets they have accumulated? (you mean mutual funds, timeshares, condos, overvalued modern art and collectibles - you call those assets? Where are their traditional riches - their land, their gold, their stores of grain and herds of cattle?)

No, in fact, history generally repeats itself. Therefore, most of the less-prepared Boomers will probably take the rightful place of most retirees - living modestly and quietly on meager fixed-income budgets, incomes ravaged by inflation, out of the way, forgotten, and, if there is any justice, not being such a burden on the young and employed.

The trillion-dollar question may be this: How will it all unfold - by what paths will we get from the current economic domination of the huge Baby Boom generation, to their eventual dotage, and, in all likliehood, downfall?

We don't profess to be experts in economics, but there must be some law, along the lines of the law of conservation of matter, that states that a mechanism cannot exist by which future retirees, in huge numbers, draw deeply over a long period of time on a set of resources that is not infinite, resources which also have to sustain the younger members of society, i.e., the gainfully employed and their families.

And we're not saying that it's a zero-sum game - of course our economy and our resources grow. But will they grow at the astounding pace necessary to sustain Boomer retirement dreams of unabated luxury and freedom? And if our economy did grow at that astounding pace, why would the Boomers necessarily be the recipients of such a huge part of it?

And if our economy doesn't grow so well, then it doesn't look good for future Boomer retirees whose assets are mostly in stocks. Their apple-cart could easily be turned over.

In the same vein, in a January 22nd Barron's article entitled "Ringing Out the Old," Thomas Donlan writes:

"Finally, we must add that the most disappointing part of the Clinton legacy is the part that isn't there. In each term, the President appointed a blue-ribbon committee to study the restructuring of the Social Security and Medicare before the system collapses of its own weight. Twice, Clinton then pushed the opportunity away, apparently calculating that the national pain of a future economic disaster wasn't worth the personal pain of an economic battle in the present.

"George W. Bush may not inherit the true legacy of the Clinton administration. That will be left to the poor sap who presides over the affairs of the nation when the Baby Boom generation retires."

As always, things happen for a reason. And maybe the 'reason' for the Boomer's downfall will be inflation and/or a crummy stock market. Either occurrence would decimate their carefully laid plans.

And maybe that's the way it will happen. It's a matter of simple economics in action - the laws that keep the world spinning on its axis, keep our economy humming and keep the money flowing, also keep geezers from enslaving the young.

 

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