Where Will Baby Boomers' Savings Go?

As 78 million baby boomers head for retirement, they will be faced with the challenge of saving like they’ve never saved before. Where are all those savings going to go?

In a recently aired Taipan Publishing Group web summit, Zach Scheidt and I talk about the “Consumer Shockwave” and its long-term impact on various areas of the market.

One of the key charts we cover is this one, the long-term consumer savings rate:

What you see here is the multi-decade decline of U.S. consumer saving habits. For the better part of a quarter century, Americans found less need to save with each passing year.

The flipside of this savings decline, of course, was an epic spending boom. People saved less because they bought more – all too often on credit.

As the boom rolled on, credit lines were maxed out; we bought as much “stuff” as we could get our hands on. The savings rate even went negative at the height of the housing bubble – not because people were feeling cash poor, but because homeowners across the land felt gloriously flush.

A Time to Save

To everything there is a season, Ecclesiastes tells us. Now the long Indian summer of American consumption has passed. The winter of our discontent is here – and that means it’s time to save.

Over the next decade, if not longer, consumer savings rates will rise. After falling below zero at the lowest point – as Americans spent all they earned and then borrowed on top of that – the only feasible direction is up.

This, in large part, is why the markets are in a funk. Consumer confidence hit an all-time low in October, as buyers went on strike against big-ticket items like appliances and cars. Retailers have been crushed (with only a handful of exceptions).

The longer that wallets remain shut, the harder it will be for the consumer-driven U.S. economy to pull out of its funk. After 25 years of decline, the move toward greater saving is a paradigm shift.

There will be big losers and big winners as a result of this shift. (As mentioned, Zach and I cover both in our “Consumer Shockwave” discussion.)

The question posed here is this: If America is heading into a long-term savings uptrend, where are all those savings going to go?

Here Come the Boomers

The “baby boomers” are the post-WWII generation born between 1946 and 1964. There are an estimated 76 million to 78 million boomers in total – and the first of them are hitting retirement age even as you read this.

78 million is a pretty big number. It’s hard to get your head around it. I first heard this analogy a few years back and it stuck with me:

Imagine a wooden footbridge crossing a wide river. The name of the river is “retirement.” The Americans crossing over the bridge are all baby boomers. The bridge is packed from handrail to handrail. On the near side of the river, the boomers spill out at a steady pace. On the far side is a bottleneck – a mind-blowing mass of people headed towards the narrow mouth of the bridge. They cover all the land surrounding the bridge for half a mile in either direction. Over a slight hill, down into the valley and beyond, it’s just a teeming sea of people – 78 million strong – as far as the eye can see. It will be nearly twenty years before the last boomer straggles across.

A portion of boomers simply won’t retire at all – but working into one’s 80s and beyond is not an appealing prospect for most people. And nearly all boomers, retired or not, will need to add to their savings cushion as a buffer against rising medical costs.

And thus, in a very literal sense, the boomers will soon have to save like they’ve never saved before. But what kind of options do they have?

Pick Your Poison

Savers can lay out their options in five broad categories: stocks, bonds, commodities, cash and real estate.

The categories are fairly self-explanatory. Cash includes foreign currency as well as U.S. dollars. (For our many non-U.S. readers, the dollar counts as foreign currency.) Commodities would include precious metals like gold and silver. There are other options, of course – like investing in collectibles or putting capital into a business – but these are the basic five.

All five options carry risk. We’ve seen that with real estate. Remember the old expression “safe as houses”? Looks like we’ll have to retire that one into the 20th century anachronism file. (“Safe as milk” is another one, thanks to recent events in China.)

So now your home is no longer the “best investment you could ever make” – a foolish bit of establishment wisdom that was allowed to run wild – and probably will not be for a long, long time.

Once home prices finally bottom out, they could flat-line for years as the supply glut is worked off... or else rise at an anemic rate barely in keeping with the pace of inflation.

We might see boomers throw a little extra elbow grease into paying off their homes and reducing overall debt loads – but that doesn’t exactly count as saving. The trouble with feeding money into a mortgage is that you won’t see that money again for years (unless you take out a new loan or sell the home at a price you can live with).

Cash Could Crash

Going with cash – i.e. money in a mattress – is another dubious option.

The dollar and the yen have rocketed higher thanks to the great unwinding of 2008 as global equity positions are reversed... but how long can that strength really last? Do savers really want to put their faith in fiat currency as the Fed’s stimulus efforts run deep into the trillions?

Consider this eye-opening bit of research from voltagecreative.com.

As you can see, the 2008-bailout tab thus far is more than all the above items combined. On an inflation-adjusted basis, we have spent as much treasure fighting the credit crisis as we did fighting World War I.

And the costs are still mounting – not just in the States but around the globe. All in all, that makes it a pretty lousy time to have a big slug of your net worth in paper currency.

Never Enough Gold

So what about gold? Could all the boomers just say to hell with paper assets of any kind, let’s buy gold instead?

Unfortunately there isn’t enough physical gold in existence to make that work.

At current market prices, there is something like $4 trillion worth of gold in the world. That’s less than the bailout tab thus far... most of that gold is not for sale anyway... and the amount of new gold mined each year is minuscule. So if boomers tried to really pile into gold, we would see the dollars-per-ounce price zoom past the Dow.

Heck, we may eventually see that one day anyway – $10,000 per ounce anyone? – but the point is, gold and most other hard asset markets are just too small to handle the flood of savings on their own. As boomers get serious about shoring up their futures, the flows will just get too big.

This is good news for commodities overall, of course. Hard assets will make a roaring comeback when we realize the full extent of what 2008 has wrought – a deluge of funny money stimulus, plus finance cutbacks morphed into major supply cutbacks for every commodity of importance.

But given all that, savers will still need other places to go besides hard assets. The plumbing of the commodities markets can only handle so much water pressure.

Bonds No Good

So how about U.S. treasury bonds then, long one of the safest, deepest, most liquid markets in the world? Will the boomers all just pile into bonds and content themselves with yields below the true cost of inflation?

Only if they’re foolish. Treasury bonds are literally the worst deal ever right now. The yield on 10-year U.S. treasuries has fallen below 3%, a record low, as the Fed openly manipulates the bond markets.

Remember that a bond’s yield is an inverse function of its price. Savers who put their money into government bonds now are going long at record high prices. By any rational assessment, they are loading up on bonds at a screaming top.

This course of action could only make sense for two reasons:

• You think we are headed for economic armageddon, Dr. Peter Venkman style – “Human sacrifice, dogs and cats living together, mass hysteria!” – and that the nosebleed price of treasuries will climb even higher (sending yields yet lower as they asymptote above zero).
• You intend to hold your treasuries to maturity, and actually believe that 3% a year ballpark is a good deal. (Which in turn would imply that the stock market is toast for the next decade or so, and furthermore that real-world inflation will stay well below 3% until your bonds mature. Good luck with that.)

Where Does that Leave Us?

Sherlock Holmes pointed out that when you eliminate all competing options, it’s the remaining option you have to go with – regardless of how improbable it may seem.

We’ve seen that the long cycle of consumer savings decline is over, and a new cycle of saving is set to begin. We’ve furthermore seen that 78 million baby boomers are preparing to make their way across the retirement bridge – and the vast majority have a huge savings job ahead of them.

Last but not least, we’ve seen that out of the five options available – stocks, bonds, commodities, cash and real estate – four of them are either deeply unattractive (cash, bonds, real estate) or unfeasible as a full solution (commodities markets too small to handle the flows).

Believe it or not, that leaves equities as the only real long-term option left. The Fed and Treasury know this too.

To be continued...

Comments

[Archman Inv...:]

Nice article.
Just one problem: There is no baby boomer retirement savings.
It is all a media created myth to keep the public throwing their money at an industry that does not "manage" assets. They "gather" assets.

An extensive study of baby boomers was done and released approx 3 months ago. Here is what they found:

50% of baby boomers will rely soley on social Security for retirement.
30% of baby boomers have $100K or less for retirement.
10% of baby boomers have $200K or less for retirement.
The last 10% have $200K or more towards retirement.

For years, the smart ones among us have known that the top 10% of this country controls 90% of its net worth. That applies to baby boomers as well.

And if you think that baby boomers selling their residences is going to make up the difference, think again. Baby boomers mortgaged their lives away just like non baby boomers, so essentially many have little equity in their homes anyway.

I made a statement to a friend last year that I know is going to come true.
Is it a sad statement:

"Over the coming 25 years, you are going to see levels of senior citizen poverty, that is going to make the depression look like a picnic."

Sad, but true. The media has failed at its attempt to fool people about all this "baby boomer wealth". Just watch as it unfolds.

Invest accordingly.

2008 Dec 03 07:49 AM

[Stephen Kanitz:]

Nice article. But a reminder. The 'pay as you go" Social Security system is a euphemism for "the youger generation pays", as you go spending their money, future savings money.

There is no way the younger generation can pay for the "unsavers" and save the required funds for their own retirement.

2008 Dec 03 09:21 AM

[jackooo:]

I feel the reason people don't save is the taxed interest rate. You can get 2 1/2% on your savings but when taxed the actual rate is 1 3/4%. Now with inflation at 5% plus that tells me that I am losing money.
Even without the tax it is a total loss.

2008 Dec 03 11:42 AM

[Jason Rines...:]

The two comments are better then the article. Boomers will spend on Healthcare. If you haven't gotten the memo on where to invest before the space gets crowded then keep doing research. Big pharma looks great for buy and hold 5 year strategy. 21% decline in drug sales this year, political headwinds, lack of innovation and monolithic corporate structure, more profits overseas then domestic. Great time to buy it cheap in 2009, but I suggest waiting until end of Q1 to see what Washington policy is going to look like toward the sector. My position is in Consumer Healthcare.

2008 Dec 03 12:33 PM

[DougM:]

Stephen: I'm a boomer at the tail end of the curve. What you say is true, but guess what, it's been true for us too! We've been paying the max into the SS system at the highest rates for the past 20 years, and continue to do so. This has funded a much higher level of benefits for the prior generation vis-a-vis their relatively lower contributes in the 40s, 50s, and 60s. Somehow we were supposed to do this and save for our own retirements. There's nothing new here, the system was and is flawed.

Jackoo: you are exactly right, the tax system treats the phantom income from inflation as if it's regular income and takes so much of the return that you end up with less purchasing power later on. Saving money means deferring $1 of consumption today for less than $1 of consumption later. The only exception is the existence of tax-deferred savings vehicles like IRAs.

Justice: I think you're too quick to write off real estate as a vehicle for investment. Not homes per se, but other forms of income property may begin to look as good as or better than equities. Income property has similar characteristics to a TIPS bond but with the benefit that the inflation component can be tax-deferred (as a cap gain).

2008 Dec 03 12:39 PM

[WAKEUP:]

Mr. Litle, you underestimate the FEAR FACTOR that not having any money in one's pockets creates. I had to go to extreme efforts to recover from a personal cash crash, and I can tell you that the fear of having that happen again NEVER goes away. The general populace is about to learn how deep that fear goes, and there is going to be a strong rebound of cash-hoarding, once these neophytes manage to reaccumulate any cash. This, of course, will delay any recovery in an economy that is consumer spending-oriented. That won't matter to the newly-minted cash-poor, however. Having realized that cash is the only savior, all groups in our economy will crave cash as a dehydrated person craves water. Once burned, the way the U.S. population is about to be burned, ALWAYS shy. No economic theory or belief will change that, for at least one full generation.

2008 Dec 03 03:42 PM

[Urbane Gori...:]

Well... My guess is that the next generation will be too busy paying for the likes of Citi and B0fA to be concerned with savings, and all the while having the interest rates on their cards and homes pushed skyward, ATM fees moving up.... You name it so these poor excuses of businesses can line the pockets of their management. It's kind of like being invited to lunch, only to have the host skip out leaving you with the bill.... As noted above, every generation seems to bear the weight of the prior generation's excess, and our children will clearly have to do their bit. It would have helped if the present administration hadn't just sat on its hands. Of course, if that were true, then we wouldn't be involved in two costly wars, nor would there have been bodies floating around New Orleans.

jegan

2008 Dec 03 04:09 PM

[perceptions...:]

"Believe it or not, that leaves equities as the only real long-term option left. The Fed and Treasury know this too."

I suggest you may want to consider Demand or the lack of it.

As Boomer move from Peak earning & Spending capacity, so their Demand factor will reduce, which has already started.

As that Demand reduces, so to will economic activity, which will adversely affect the equities markets.

2008 Dec 03 04:55 PM

[fran:]

mr. litle-- i'm anxious for the "to be continued" to begin and to know your explanation of"...and the gov't knows this too..."

the comments illustrate "cognitive dissonance"-- we have, but we have not; we can't spend that which we don't have; the interest/gain on what we have is not sufficient; the younger won't/can't support the boomers who have not saved, but you say must/will save; we can't/won't work[earn] forever.

as i siaid, i look forward to "....to be continued"

2008 Dec 03 05:01 PM

[bigmoney:]

I'm not sure about stocks either. Treating the stock market as a bank account, without corresponding economic expansion just results in pumping up P/E ratios, causing prices to become unstable. Or perhaps the CEO's will just give themselves more & more stock options for lack of anything better to do.

I think relative performance is more important than absolute performance. Even if your net worth is declining, if its declining slower than your neighbors, then its a job well done. If after another decade, you can buy more housing, hamburgers, and health care than your neighbor, then you are winning the race, relatively speaking.

2008 Dec 03 05:52 PM

[Jade Queen:]

My issue with big pharma is side effects. You can only gag people for so long before it gets in the New York Times anyway. Some of the plaintiffs being gagged probably are not reliably gaggable over the long term.

When a big case hits, a senator could read some fine print somewhere, such as Sen. Grassley recently did when he questioned Harvard about a particular child psychiatrist named Joseph Biederman. This could mean big trouble over time. There are some major life-shortening side effects from some of the biggest sellers, and some physicians are changing how they do things in response.

There are other cultural and economic changes that will challenge the pharmaceutical industry. I am sure there will be some winners, but figuring out the winners is going to be difficult.

What if boomers start using those gym memberships they buy or get gifted with in December? They will be losing weight, saving money, and sparing themselves side effects. It's not a bad thing to do with your time when you're laid off.

If Gleevec works on diabetes and other major ailments, that will be a game-changer, but even that will be unclear for a long time yet.

2008 Dec 03 07:31 PM

[Fliujniligui:]

The thing to do is to go in Canada and there is not all of these problems, or when they are there, they are manageable.

2008 Dec 03 08:16 PM

[Tony Petroski:]

John Egan: If it weren't for Bush there wouldn't have been bodies floating in New Orleans? You've made many good comments, but what is this?

2008 Dec 03 11:33 PM

[SpinWatch:]

Annuities are frequently left out of stock-justifying articles. Boomers will be far better off with a diversified portfolio of annuities (to augment CD’s and Social Security), than with declining stock portfolios. As more Boomers retire, more will take their money out of the market causing stock prices to drop far more than the current credit crisis “crash”. Financial planning discussions should add annuities as an asset class to stocks, bonds, cash, commodities, and real estate.

2008 Dec 04 12:01 AM

[Did U Think...:]

Yeah I'm sure that everyone will pile back into equities after they finish the 90% crap out that is coming. This is 1929-1933 redux and stocks did not recover to their 1929 highs until 1955 in real terms, and probably much longer in inflation adjusted terms.

Said differently, once a mania is bust it will not be the next boom. Stocks are toast for a long time to come.

2008 Dec 04 01:58 AM