As Baby Boomers Spend Their Savings, Will the Stock Market Decline?

Some economists say that when the baby boomers sell off their assets to pay for retirement, there could be a decline in demand for stocks. If all the members of this unusually large generation sold their stocks at the same time, the theory goes, the prices of those assets could fall. But a new Congressional Budget Office (CBO) analysis found that baby boomers will not sell their accumulated assets quickly after they retire. “An evaluation of the evidence, however, indicates that such a dramatic decline in asset demand and prices is unlikely,” says Douglas Elmendorf, director of the CBO in the report. Here’s why the CBO says baby boomers won’t deplete their nest eggs too fast and cause a stock market decline.

Cautious retirees. Most retirees have historically been wary about selling assets because they might need that money if they live longer than expected, for medical costs, or for other unexpected expenses. The CBO predicts that baby boomers, who are likely to live longer and face higher health costs than previous generations, will continue to save for these two expensive possibilities.

Bequests. Not all seniors want to spend every dime they have accumulated. Some retirees intentionally don’t spend their entire nest egg because they would rather leave their investments to children, family members, or make other bequests.

Uneven wealth distribution. About one third of U.S. financial assets are held by the wealthiest 1 percent of the population, according to the CBO. The wealthiest Americans won’t need to dip into their savings to pay for their golden years. Interest and returns alone can comfortably finance their retirement.

Working longer. Baby boomers who have seen their retirement savings decline significantly over the past year may decide to delay retirement. Working longer will shorten the duration of retirement and reduce the amount of assets immediately sold off.

Getting conservative. Demand for stocks could be diminished if retiring baby boomers swap risky assets for safer investments. But most people do not currently change the asset allocation of their portfolios upon retirement, CBO says.

Foreign demand. Even if older Americans sell off their assets to finance retirement, the CBO expects an increase in foreign demand for U.S. assets primarily from investors in developing nations with emerging economies and relatively young populations.