Sunday, December 28, 2008

Boomer's Wake Rule #4 - Old people don't spend money!

Boomer’s Wake Rule #4 – Old people don't spend money!
As we already discussed, the first baby boomers reached retirement age last year and the number scheduled to retire will accelerate for the next 15 years when births per year peaked (around 1960). 

So why does this matter?
Simply put, the average person reaches peak spending in their 40's, when they have kids in their teens and are at their highest salary levels.  And they reach their peak investment in the markets and real estate in their 50's, when the kids finally move out and are on their own.  However, when the average person reaches their 60's, generally speaking, people tend to tighten up their spending as they start to wind down their careers and prepare for retirement.

Normally, a person's largest retirement assets are their home and their stock portfolios.  If you haven't noticed, home prices have been halved in the past few years and stock portfolios have followed right behind, being nearly halved as well in the past year or two.

So we now have what I call a headwind! A major demographic group is reaching the time when they would have already started spending less naturally, but are now forced to save even more in an attempt to make up for the major corrections that have taken place in their two largest assets.

Investment Headwinds
Whether they cashed out of the current market or not, will the average retiring boomer aggressively contribute to the stock market in the future?  Given their reduction in income and need to be more conservative, it was likely that many wouldn't have regardless, but now that they have suffered 30-50% losses over the past year, are they out of the market for good?  I tend to believe that it is highly unlikely that we will be returning to the market returns of the '90s when the boomers were in their 40s and 50s and investing aggressively.  And we may not return to those types of average returns until their kids start earning some significant income and making significant investment contributions, which could be at 10-15 years from now.  2018-2023?

Real Estate Headwinds
When I was trying to buy 2-4 unit investment properties a few years back, it was nearly impossible to find them.  1031 exchanges were off the charts as 50-somethings were exchanging properties, selling ones they purchased years back, at much lower prices.  Many properties were being sold sight unseen.  However, now that the prices are all down so significantly, will a retiring boomer be more likely to sell into any strength or buy more properties so close to retirement?  And, will a baby boomer be more likely to downsize their home or upgrade?  

Of course real estate is a regional business, but generally speaking, it would seem that a person approaching retirement, who just had their retirement account halved, would be less likely to buy new investment properties and more likely to downsize and/or cash out when they have the next opportunity to do so.  And once again, their kids aren't in a position to pick up the slack for at least 10-20 years. 

Retail Headwinds
Since we are in a serious recession, all retail is suffering.  Clearly, people still need to eat and find Walmart to be the discount shopping venue of choice.  The echo boomers are spending more than they have, doing their best to keep the economy above water.  It will be interesting to see who wins this tug-of-war between those retiring and spending less versus those growing into their careers and earning more disposable income over the next 10 years.  

Once the echo boomers reach the age where their kids start growing up, we will likely return to really great economic conditions.  But prior to that we have two concerns.

1) If retail stores start to close due to a slowdown in spending, entire groups of employees also get fired.  That, in itself, creates further economic headwinds.  Watch the unemployment rates over the next few years.

2) In terms of investing in companies that sell via retail, I would recommend focusing on very targeted, niche retail and deep discount stores until strong and sustainable economic conditions become visible.

Where Do They Spend Money?
Check out your parents' and grandparents' Visa bills and find out!  Obviously there are some areas that have a very nice demographic trend.  Retirement Communities, Medical and Travel are obvious areas where boomers will be spending money in the next 10-20 years.  Get creative and do some homework to find other areas poised to grow over the next decade.

We need to become niche investors going forward.  Buy and Hold was a concept made very popular in the '80s and '90s when the market was basically going straight up for 20 years.  Beware of investment advisers and family members that reiterate the mantras of the last bull market and start getting smart and creative in your investment choices going forward.  

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