Action Line: Stock market can easily survive retiring baby boomers
BY PHIL MULKINS World Action Line Editor
Friday, December 07, 2012
12/07/12 at 4:48 AM
Dear Action Line: I hear "baby boomers retiring will crash the stock market." Is this just another hoax? - S.P., Broken Arrow
Certified financial planner Cathy Pareto, founder of Cathy Pareto & Associates, Coral Gables, Fla., said: "There were 77 million baby boomers born 1947 through 1964 - 4.5 million per year - and some doomsayers predict they will drain the equity markets of their capital once they retire. This is highly unlikely for many reasons. As baby boomers near retirement, they will undoubtedly shift strategies, transitioning from the accumulation phase into the capital preservation phase of their lives. However, a portion of fixed income is not equivalent to 'all' or 'most' of their investments, as some doomsayers predict.
"Numerous studies conducted on retiree distribution rates indicate a healthy allocation to a diversified portfolio of stocks is essential to ensuring retirees do not outlive their cash. Therefore, all of these factors combined imply boomers will continue to own a substantial amount of equities during retirement," she predicts.
The greatest fallacy in this argument is there will be a mass exodus of stock investors from the market. This is a flawed presumption as the span of time between the oldest and youngest boomers is 18 years. Assuming all retire at age 65, that would have the first retiring in 2012 and the last in 2029, hardly a short term.
Sylvia Karimian, certified financial planner and co-owner of Karimian & Associates in Tulsa, an Ameriprise Financial Services practice, said: "Although investors may reduce the percentage of their portfolio held in stock as they approach retirement, they may continue to own stock for dividends and long-term-growth potential after retiring. They might choose to reduce their exposure to equities for several reasons. When major tax law changes occur, they can sell to take advantage of capital gains at a lower rate. They can also reduce stock exposure to reduce market risks in their portfolio or to increase the potential for more income and greater stability.
"But they aren't likely to do this en masse," she said. "Market uncertainty, due to fiscal policy, can create a climate that might cause investors to reduce their stock exposure, as well. That can be detrimental as it creates uncertainty among young and older investors alike. Stock prices are not determined based on buyers alone. When stocks are cheap and investors are wary, companies sometimes take the opportunity to buy back their own stock thus creating the potential for more value and earnings for their existing shareholders. The more value they bring in through earnings and appreciation, the more attractive their stocks are in comparison to other alternatives such as bonds and CDs.
"More and more employees have access to purchasing equities through their company retirement plans. They can, and do invest in stock mutual funds or through managed accounts that allocate percentages to stocks. If stocks continue to produce the desired return, investors will likely maintain some balance of stocks in their portfolio during retirement," Karimian said.
Original Print Headline: Market OK to see boomers retiring
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