The Breakdown | Explaining Southern California's economy

Boomer Bubble: How Baby Boomers plan to spend all their money now and wreck the stock market for decades

Ah, Baby Boomers… soon they'll begin retiring in force, straining Medicare and Social Security. And according to recent reports and studies, they'll also be spending every dime they've socked away, forgetting about leaving an inheritance to their children and…dooming the stock market to pitiful returns for years to come as they withdraw their gains. Talk about the Big Chill!

The LA Times checked in on Boomer plans to enjoy their golden years — and enjoy them to the max:

Upending the conventional notion of parents carefully tending their financial estates to be passed down at the reading of their wills, many baby boomers say they instead plan to spend the money on themselves while they're alive....In a survey of millionaire boomers by investment firm U.S. Trust, only 49% said it was important to leave money to their children when they die. The low rate was a big surprise for a company that for decades has advised wealthy people how to leave money to their heirs...."We were like 'wow,'" said Keith Banks, U.S. Trust president.

Meanwhile, the Federal Reserve Bank of San Francisco published an "Economic Letter" last month in which researchers explored the long-term impact of Boomers sucking their money out of equity markets:

The baby boom generation born between 1946 and 1964 has had a large impact on the U.S. economy and will continue to do so as baby boomers gradually phase from work into retirement over the next two decades. To finance retirement, they are likely to sell off acquired assets, especially risky equities. A looming concern is that this massive sell-off might depress equity values…Many baby boomers have already diversified their asset portfolios in preparation for retirement. Still, it is disconcerting that the retirement of the baby boom generation, which has long been expected to place downward pressure on U.S. equity values, is beginning in earnest just as the stock market is recovering from the recent financial crisis, potentially slowing down the pace of that recovery.

OK, now brace yourselves. There's some bad news ahead for anyone hoping to see pre-financial crisis stock markets returns in the next…um, few decades. Beware, there's some financial mumbo-jumbo in here (check out the chart above right if you want the dire visual prediction). But the message should be clear. Stock prices are headed south:

The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027. On the brighter side, [in 2025] we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.

Sooo…if you're not a Boomer, but you can hang in there for about 15 years, you should be able to lock in a nice return on your agony. Then again, if the Fed researchers are right, you're going to be buying into a declining market for something like ten years. Buy stocks. Watch them go down. Buy more stocks. Watch them go down more. A stomach of iron will be required to endure the neverending dip. It will be like riding the scariest roller coaster in the free (market) world. And the ride will (almost) never end.

These phenomena — Boomers deciding to die broke along with the related stock downturn — are going to enrage Generation X, the cohort born after 1964 that has labored in the Boomer shadow and may now witness the Mother of All Bear Markets, brought on by Boomers doing what they are entitled to do, which is divest themselves of risky equities (it's their money, after all).

However, that rage might be misplaced. If Boomers do push equities down, bursting the Boomer Bubble, there should be buying opportunities a-plenty. Gen X and Millennials, the generation right behind, are just going to have to be very, very, very patient. So settle in for the wait — and watch the Boomers at play!

Chart: Federal Reserve Bank of San Francisco