Archive for the ‘Baby Boomers’ Category

How Baby Boomers Can Benefit the Economy – Keep Working

Friday, May 10th, 2013

If baby boomers decide to postpone their retirement, it may not solve all of the country’s economic problems, but it will help address most of them.

So it’s good news that a growing number of boomers are postponing retirement.  Today, almost 18% of people older than 65 are still working and the number is climbing.  In 1993, only 11% of people older than age 65 were still working, according to the Bureau of Labor Statistics.

Of course, many boomers will be forced to keep working, because they have not saved enough or because the performance of their retirement portfolio has not met their expectations.

Others, though, will keep working simply because they want to work.

So how will it help the economy if boomers keep working beyond 65?

Fewer Small Investors: What It Means

Tuesday, July 20th, 2010

In our last post, we made the point that small investors are having a smaller impact on the stock market.

So what does it all mean? 

For one thing, it signals a significant change in the role of the small investor.  In the 1990s, as small investors jumped into the market in force, they increased demand and pushed stock prices up.  Now, as investors flee the market, their exit is becoming self-fulfilling to some degree, as the exit by a large number of investors has held down stock prices.

The market void is being filled to some degree by high-frequency trading (HFT), in which computer-driven trading by large firms attempts to take advantage of momentary pricing inefficiencies.  With HFT, highly leveraged trades take place in nanoseconds.

 Readers of Wenning Advice, our electronic newsletter, may recall our last issue, in which we discussed the increasing dominance of HFT and its role in the “flash crash.”  We noted that HFT now accounts for a majority of equity trades.  TABB Group, which researches financial markets, found that HFT accounts for 73% of all equity trading, up from 30% four years ago.

 With small investors leaving the market, the dominance of HFT will increase.

 The down side is that as investors leave the market, pricing is less reflective of demand.  Pricing historically has been driven by the principle of supply and demand.  A stock performs well when its fundamentals demonstrate great potential for investors.

 Early predictions are that profit reports will be very favorable this quarter.  As companies post their quarterly profits, it will be interesting to see how the market reacts.

 It’s difficult to tell just how the market will react.  HFT could, in fact, contribute to wider price swings than if prices were affected solely by investor sentiment.  As such, short-term, we believe it is wise to keep stock investments in place, as investors who sell now could miss out on a major opportunity.

 Long-term, though, many factors are working against the market, including the potential of a double-dip recession and the possibility of continuing sovereign debt issues in Europe.

 What about in years to come?  We believe that the role of the small investor, like the market itself, will ebb and flow.  The small investor will be back and the market will benefit as a result.

Small Investors Making Smaller Impact

Friday, July 16th, 2010

Small investors get no respect.  When they’re leaving the market, it usually means the market is heading up.  When they’re investing in the market, it usually means the market is heading down.

Some professionals even use the actions of small investors as an indicator of the market’s direction.  To make money in the market, do the opposite of what the small investor does.

As evidence, consider the stampede from the stock market that took place in early 2009.  Many investors stuck it out through major losses in 2008 and finally, unable to take any more financial pain, they exited the market – just before the historic rebound that began in March 2009.

They’ve been tentative about getting back into the market and seemed to be gaining renewed faith in the market again until May, when the “flash crash” spooked them all over again.

So does that make this an ideal time to invest in the market?

Before you sell all your earthly belongings and bet your life’s savings on a market rally, consider that small investors have had it right for the most part in recent years.  Investors withdrew more money from equity mutual funds than they put in during 2002, 2007, 2008 and 2009, with that three-year period marketing the first time withdrawals exceeded investments since 1979-1981, according to the Investment Company Institute (ICI).

This year, inflows beat withdrawals in January, March and April, but withdrawals exceeded inflows in May.  Again, small investors have not been far off.

Small investors have jumped into bonds and other investments, and have kept much of their savings in cash.  But how have they fared compared with consistent stock investors?

“The S&P 500 stock index has fallen at an annualized rate of 3% a year over the past 10 years, including dividends and controlling for inflation,” according to The Wall Street Journal.  “Long-term Treasury bonds show a gain of 5% a year during that same period, after inflation.  Gold is up 10% a year and real-estate investment trusts 8% a year.”

Other Factors

The market exit by small investors is driven not only by fear and poor performance, but by need.  Dollars invested in stocks increasingly have been needed to pay off debt.  Why invest in an uncertain market when your funds could instead be used to pay off credit card debt?  Given the impact on credit scores and high interest rates, paying off debt is often the wiser use of limited funds.

Unemployment fears and the aging of baby boomers are also having an impact on investment behavior, according to Dr. Joe Duarte’s Market IQ

In addition, data from the ICI shows a drop in risk tolerance among young investors.  In 2009, just 30% said they were willing to take above-average risk in the stock market, down from 37% in 2008.  The number willing to take below-average risk or no risk at all rose to 20% from 14%.

So what does it all mean?  We’ll explain in our next post.

Bust-Proof Investing For Boomers

Wednesday, March 31st, 2010

We’ve been focussing on the “senior bust” that many baby boomers will face as they approach retirement. 

So how can baby boomers avoid the senior bust?

The starting point is to understand your finances.  You’ll need to know your current assets and have a good idea of how much you’ll need to live off during retirement.  Assuming your current retirement is not adequate, you’ll need to save more and invest wisely.

Some alternatives include:

Delay retirement.  The longer you work, of course, the more you can save and the longer it will be before you need to draw off of your retirement funds.  Assuming your children are grown and your expenses are minimal, you can probably save a great deal more for retirement than you could when you were younger.

Delay Social Security.  Annual cost-of-living increases are calculated using the initial year’s Social Security income as a base, so delaying the start of Social Security for even a few years can raise annual income significantly.  While individuals are eligible for Social Security at age 62, they must wait until age 65 if they want “full” benefits (67 for those born in 1960 or later) and age 70 if they want “delayed” benefits.

Manage risk.  Keep in mind that what your investments earn from day to day or even year to year is not nearly as important as what they earn long term.  Most investors concentrate on short-term returns and don’t spend enough time focusing on avoiding losses.

An investor or investment manager can do much to avoid risk, without sacrificing growth.  A few examples include:

  • Diversify.  Virtually anyone who manages investments recommends that investors invest in a mix of many different types of investments.  For example, the stock portion of an investor’s portfolio may include growth and value stocks; small-cap, mid-cap and large-cap stocks, and international and domestic stocks.
  • Pay attention to the market.  Using technical as well as fundamental analysis can alert investment managers about potential market changes.  Adjusting your portfolio based on these potential changes can help minimize losses.
  • Use stop losses.  Stop losses are used to automatically sell securities when they drop to a certain price.  This allows investors to avoid potentially large losses.
  • Consider convertibles.  Convertible securities combine features of both stocks and bonds.  The income they produce provides downside protection.  In addition, they are typically not as volatile as stocks.

Of course, among the worst mistake investors can make is to sell their stocks when the market is bottoming out.  “Selling low” is also among the most common mistakes investors make.  Those who sold a year ago because they couldn’t tolerate any more losses should learn from their mistake and hopefully will avoid selling at the tail end of the next bear market.

Boomer Budget Busters

Saturday, March 27th, 2010

In our last post, we demonstrated that baby boomers will not be inheriting the trillions that experts predicted would create the wealthiest generation of retirees in history.

Even worse, boomers face enormous expenses, even without considering the potential cost of healthcare reform,   

The U.S. Census Bureau says there are more than 77 million baby boomers, defined as those born between 1946 and 1964.  By 2030 all boomers will be over 65 and will represent an estimated 20 percent of the population.

The addition of that many retirees is bound to put a strain on both the Social Security system and Medicare, not to mention the long-term care industry.  And that strain will be exacerbated if boomers live longer than previous generations, as expected.

Long-term care.  Consider the cost of long-term care, for starters.  Many of today’s boomers have parents receiving long-term care and it’s costing, on average, $72,270 a year, based on national statistics from the 2009 MetLife’s Mature Market Institute.  Long-term care is not covered by health insurance, Medicare or any other government program, so most baby boomers will have to use their personal savings to pay for long-term care.

The National Clearinghouse for Long-Term Care Information estimates that 70% of people over age 65 today will need long-term care services.  If baby boomers live longer that today’s seniors, the percentage needing long-term care may be even higher.

Social Security.  Social Security is a pay-as-you go system, meaning that the money you have been paying into the system throughout your working life is paying for someone else’s retirement.

When boomers retire, a greater percentage of the population with be retired and a smaller percentage will be working.  That means fewer people will be paying to fund Social Security for a much larger population of retirees.

In addition, when people live longer, they collect Social Security for a longer period and that puts further pressure on the system.  When Social Security was created, retirement typically lasted only a few years.  Today, a person may live for 20 years or more during retirement.

In 1950, there were 16 workers to support each Social Security beneficiary.  Today, only 3.3 workers are supporting payments for each retiree so, not surprisingly, the Social Security tax is 70 percent higher than it was in the 1950s.  The Social Security Administration projects that the ratio will drop to 2.2 workers per retiree by 2025 and to 1.8 workers per retiree by 2070.

Medicare.  Medicare is “headed for a financial abyss,” according to The New York Times, which notes that the trust fund that pays hospital bills will likely run out of money by 2019, “leaving Medicare to limp along with payroll tax collections that would cover only 78 percent of estimated hospital expenditures.”

The Times adds that the trust funds that pay for doctors’ services and prescription drugs is also face rising costs that will drive up premiums and require more funding from general tax revenues.

Will healthcare reform solve this problem?  Don’t count on it.  To keep the overall cover of reform in the $1 trillion range, Congress is proposing a reduction in Medicare funding by up to $500 billion over the next 10 years – just as boomers are retiring and signing on for Medicare coverage.