Are Boomers Crashing The Economy Or Saving It? Why Investors Are Perplexed And What You Can Do To Prepare

Zinger Key Points
  • Economists are torn over the fate of $76 trillion of boomer money as those born 1946 to 1964 enter retirement.
  • Baby boomer spending has been said to be saving the U.S. economy from a recession, yet spending patterns tell a different story.

The mass retirement of the boomer generation has been anticipated as one of the most impactful economic events of the 21st century.

Economists are still trying to understand the consequences of the wealthiest generation in human history going into retirement by the millions each year.

Expectations so far have been varied. While having massive amounts of people leave their productive jobs in exchange for government pensions has been deemed an existential risk for modern civilization, the situation also entails the largest wealth transfer in history, as baby boomers pass away and leave their wealth to their Gen-X and Millennial offspring.

Are Boomers Preventing The Invisible Recession?

The short term consequences of this transition on the U.S. economy are still being defined. Some experts anticipate that retiring baby boomers will boost the economy through increased spending in their golden years.

That has been the dominant narrative for economists looking at spending patterns across age gaps. The average behavior for citizens of advanced economies has been commonly explained by using the "life-cycle hypothesis."

This hypothesis argues that people try to maintain roughly the same level of consumption throughout their lifetimes. They do this by taking debt when their income is low in their youth, saving when their income is high during middle-age, and diving into their savings (or liquidating investments) in retirement.

This hypothesis has led economists to believe that the transition of baby boomers into retirement could revitalize the economy. As retirees begin to liquidate billions of dollars in previously stored assets, such as stocks, properties, and other investments, this influx of active capital will be fed into the market to finance their later-life lifestyles.

The argument is valid when considering that the baby boomer generation makes up 20% of the U.S. population, but owns 52% of its wealth, according to Fed data.

Wall Street veteran Edward Yardeni recently wrote in the Financial Times that the boomer generation and its spending habits are saving the American economy from a recession.

Following the pandemic and the outbreak of war in Europe, a U.S. recession was widely expected but never arrived, making it the "most widely anticipated recession that didn't happen."

A poll conducted in May revealed that most Americans think they're living in a recession, although the numbers don't tell the same story.

Over the past two years, it's been reasonable to expect a recession given the signals stemming from the U.S. economy. Decades-high inflation leading up to rising interest rates could have naturally resulted in contraction.

Another sign of an upcoming recession, says Yardeni, was the inversion of the yield curve for the 2-year and 10-year Treasury notes, which has consistently been a predictive sign of contraction for the past seven recessions.

Yet for Yardeni, the injection of potentially $76 trillion of boomer wealth into the economy has been the principal barricade holding off a recession in the U.S., as baby boomers spend their hard-earned cash in travel, leisure, gastronomy and healthcare.

"All these services industries have been expanding their payrolls, thus boosting real incomes, and fuelling more spending," writes Yardeni.

Read also: Ex-Teacher-Turned-Fund Manager’s Bold Bet On Rising Rates Propels Turned A Small Pension Fund Into A Top Performer — Here’s How

Yet Boomers Are Not Burning Through Their Retirement Funds

Other commentators have not been as quick to label boomer money as the savior of the story. 

According to a piece in The Economist, the unprecedentedly rich boomer generation has also been extraordinarily stingy.

According to the analysis, baby boomers have been preserving, or even trying to grow their capital more than any other generation going into retirement in the past.

All across the developed world, the rates of saving versus spending for people above the age of 65 has increased. In the U.S. by the mid-1990s, "those aged between 65 and 74 spent 10% more than they took in, but since 2015 people this age have saved about 1% of their income," according to the outlet.

Similar examples can be found in countries experiencing an early wave of boomer retirement, like Italy and Japan, which have two of the oldest populations on the planet. More examples across the UK, Canada, Australia, South Korea and Germany show that boomers are clinging to their investments and slowing down the rate of spending, going directly against traditional economic theory and expectations.

The reasons for this behavior include a desire to leave part of their wealth to struggling younger generations, as well as worries about health-care access following the Covid-19 pandemic, which also changed consumer patterns permanently for the older folks.

Boomer Spending Trends: Numbers point in the direction of a bigger desire to bequeath saved-up wealth to generations that are having trouble affording their first home or repaying student loans, with Americans inheriting "about 50% more each year than they did each year in the 1980s and 1990s."

As the life expectancy for current retirees grows, so does their willingness to be prepared to face health-care costs through a longer time frame, thus becoming more cautious with their spending.

Ownership of equities and real estate has never been higher in U.S. history.

Data from the Federal Reserve of St. Louis shows that U.S. household net-worth hit its highest historical level during the latest available reading, from December 2023. The same goes for the holding of financial assets like stocks and bonds, as well as non-financial assets like real estate.

This supports the notion that baby boomers entering retirement are not liquidating their assets as quickly as many economists had anticipated.

In turn, retired boomers may be prioritizing passive income from rental properties as well as stock dividends.

Investors looking to replicate this strategy in the stock market could be looking at reliable high-dividend stocks like Coca-Cola Co KO and Verizon Communications Inc. VZ, which boasts a 12-month trailing dividend yield of 6.74%.

Realty Income Corp O or AT&T Inc T are also on the list, both with a yield of over 5% this year and an annual growth rate of over 3%.

Three health care stocks have had dividend yields above 4% this year, including Pfizer Inc PFE, CVS Health Corp CVS and Bristol-Myers Squibb Co BMY. Johnson & Johnson JNJ trails behind with a dividend yield of 3.2%.

Now read: Early Retirement Pitfall: Man Faces Liquidity Crisis Despite $2.4M In 401(K)

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