Are Demographics Destiny?

Wine CorksFor at least a couple decades, researchers have been fretting over the time when contributions into retirement plans would be dwarfed by withdrawals out of plans. Well, that time has finally arrived.

Data from 2013 shows net withdrawals from 401-k plans of $11.4 billion. This may indeed be an inflection point or the trend may reverse itself as some believe. One of the main unknown variables is the contribution rate by millennials over the coming years. This generation has shown a better propensity for saving than boomers but so far that has not translated into dramatically higher retirements savings.

401-k plan assets total $4.5 Trillion today, almost triple their aggregate value in 2000. Demographers tell us that over 10,000 baby boomers reach age 65 each day and this will continue for another decade . Even so, some researchers believe that the net withdrawal trend we are now experiencing will turn around in a matter of a few years. Still others forecast this to continue until 2030.

As with all aspects of financial life, individual behavior is difficult to predict. While the exact turning point may be impossible to determine, those nearing retirement age (or those already retired), are maintaining higher allocations in stocks than was previously the case. Many recognize the need for continuing positive above inflation returns and understand that stocks likely provide the clearest path. Most retirees also acknowledge that there is a reasonable chance that they may live to age 90 or beyond, a factor that was not generally considered even a decade ago.

Hundreds of “doom and gloom” books have been authored over the past 20 years describing the convergence of increasing numbers of retirees and decreasing stock allocations. From our vantage point, as advisors to a significant number of retired investors, we don’t see the “demographic time bomb” at all. The fear that retirees would jump out of the stock market as soon as they crossed the threshold into retirement has been proven false. The “new longevity” phenomenon has largely cancelled out those concerns.

Those in their mid 60’s and above have correctly surmised that the retirement income equation cannot be solved without assuming some emotional discomfort in the form of temporary price variability from stocks. It often comes down to either changing your lifestyle or changing your behavior.

So, maybe demographics isn’t destiny after all. Life is more than numbers. Ready for a real conversation?

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