I picked this out of a Bremer Investment Management Update 4thQ 09.

“Green shoots continued to emerge during the third quarter, indicating the recession is over and the world economies are on the mend.  However, we believe the headwinds of high unemployment and a cautious comsumer will lead to tepid growth for the foreseeable future.  Markets continued to rally around the globe, driven by optimistic growth, low interest rates and high levels of liquidity.  Despite uncertainty over the shape of the recovery, investors drove stocks higher during the third quarter.  The S&P 500 rose 15%, registering the best quarter on record since 1998.  International stocks fared even better, returning over 19%.

The baby boomer generation includes those born between 1946 and 1960, during the post World War II population explosion.  As the first of the baby boomers turn 65 in 2011, there will begin to be a massive shift from those who are accumulating assets to those who are selling assets to fund their life in retirement.  This demographic shift has the potential to impact financial markets and the demand for risky assets, such as stocks.

Many believe that previous asset booms were due to baby boomers accumulating assets for retirement, giving rise to concerns that a sell-off or market “meldown” would occur as those baby boomers aged.  Because this is the first massive demographic to make its way through the financial markets, the potential effect on stock returnsis unknown.  But certain factors suggest the market impact could be minimal.  Certainly, if all boomers sold their stocks immediately upon retirement, the dramatic decline in asset demand would lead to falling stock prices.   However, there is a lot of evidence that suggest that boomers won’t deplete their nest eggs too fast.  Here are some reasons why:

1.  Withdrawals will happen gradually over time.  Data generally shows that among retired households, assets are depleted modestly, if at all.  A key reason for asset retention is the highly concentrated nature of wealth in the United States.  Most retirees have relatively little asset wealth to sell, and those who do, typically aren’t likely to sell much in retirement.  For instance, more than two-thirds of boomer savings is held by the wealthiest 10%, who will likely be able to support themselves from sources such as dividends without selling assets.  On the flip side, about a third of boomers have no financial assets to sell.

2.  Cautious Retirees.  The households that do have substantial wealth are typically more cautious about selling assets to finance consumption.  Many will hold onto their assets with the intention of leaving a bequest.

3.  Retirees continue to hold stocks.  Although traditional investment advice says that retirees should reduce their equity holdings, retirees continue to hold a substantial amount of their wealth in stocks.  In fact, households headed by those over the age of 70 had roughly an average of 60% of their financial assets invested in stocks.

4.  Putting off retirement.  The demand for assets will likely remain high as boomers push back the timing of their retirement due to the “Great Recession”.  Many boomers will continue to work past the traditional retirement age, decreasing the demand to sell off assets.  A recent study at the University of Michigan found the 57% of older workers say they expect to work full time after age 65 compared to only 47% a year ago.  An increase in income earning years would decrease the need to spend down assets.

5.  Demand for risky assets will come from other sources.  Increased foreign demand for U.S. assets could potentially offset lower domestic demand for equities.  Savings in emerging market countries continues to grow rapidly as their local supply of quality assets is sometimes limited by political  and soci-economic constraints.  As a result, emerging market asset demand is channeled into developed market assets – such as those in the United States.  In addition, Generation Y (those born in the 80’s and 90s) is a population cohort that is almost as large as the boomer population, and they will be an increasingly larger purchaser of boomer assets as they enter their peak earning years.

The looming retirement of baby boomers is not likely to lead to a large market sell-off caused by lack of demand for risky assets.  However, baby boomers may affect stock market returns through broader macroeconomic means.  Generally speaking, capital becomes more productive  with more and better quality labor to use  that capital.  Because the growth rate of the U.S. labor supply is expected to fall, return on capital may fall without significant productivity increases.  In addition, (4.5 workers/ retiree in 2005,  approximately 2 workers/retiree in 2035.  Source: United Nations Statistics Division) younger workers will have to bear a much larger burden iin the future in order to support the increasing number of retirees.  Given the political influence that seniors have, an increase in payroll taxes to support the needs of the boomers in the future seems plausible.  Such an increase could represent a significant drag on U.S. economic growth.”

I though that this was interesting brain food to store for the future.  All of this has an impact on real estate.