In recent articles, I wrote of the General Accountability Office’s endorsement of Wall Street’s rosy view of the retirement prospects of Baby Boomers, and also questioned assumptions regarding expected total return on which these views are based.

The Great Retirement Experiment
The Great Retirement Experiment

One question that remains is the value of assets that Baby Boomers must sell in future years if they are to achieve their retirement expectations.

Daniel R. Ackerman, CFA, on his web site, The Great Retirement Experiment, has published two free e-pamphlets that are worth reading and that not only question the wisdom of pinning retirement expectations on past stock market total returns, but also provide estimates of the volume of assets that Boomers would have to liquidate in order to achieve their retirement goals.

Estimating Baby Boomer Future Liquidations

For example, these studies suggest that for Boomers to realize their expectations (based on the commonly-held belief of an 8% annual return on equities), would require, at current prices, $1.7 trillion in annual asset sales by the peak year 2027.

This is not to say that Boomers will really sell that volume of investments in 2027, for they may not achieve their hoped-for returns of 8%.

The point, however, is that, either the Boomers won’t meet their goals because their expectations of total returns were over-optimistic, or that if these goals are actually met, the volume of investments that would need to be liquidated to benefit from this ‘wealth’ would be so great as to make cashing out at these levels impossible.

Commonsense Long-Term Strategies

Now, although nobody can reasonably forecast the US capital market over the next thirty years, a commonsense examination of relatively simple projections suggests two strategies for long-term investors:

  • If you are a Baby Boomer: Get out of investments whose returns depend upon your ability to sell out to someone else ten or fifteen years from now. It would be better to increase your savings and count on reinvesting income and principal that is promised to be paid by issuers.

  • If you are a Post-Boomer: Don’t get suckered into the same equity-mutual fund trap as your elders and be ready to take advantage of investment opportunities that arise as Boomers are forced to sell investment assets to pay for their retirement.

Now, most people won’t take this advice, but rather will continue to invest on the basis of mutual fund advertisements in Money Magazine.

To me, this suggests that many Baby Boomers will end up reducing budgets to make it through their Golden Years and maybe will need to move in with their children (if they will have them).


In a recent study of the effect of the retirement of Baby Boomers on the price of equities, the GAO based its conclusions on the assumption that equities will provide real returns of over 7% over the next decades, stating:

Implanting False Hope
Implanting False Hope

“Returns on investment are important in helping many Americans accumulate sufficient savings throughout their working lives to meet their retirement needs. From 1946 to 2004, U.S. stocks have returned an average of 8.0 percent annually, adjusted for inflation.”

“According to a recent study surveying the literature, such simulation models suggest, on the whole, that U.S. baby boomers can expect to earn on their financial assets around half a percentage point less each year over their lifetime than the generation would have earned absent a baby boom.”

The GAO conclusions were dependent upon investors earning at least 7.5% per year on equity holdings, after inflation, for the foreseeable future.

Is this projection reasonable and is it based on fact?

And, why is this important?

Where Expectations of Market Returns Come From

The $14.9 trillion market value of US domestic equities (Q1 2006) is predicated upon common expectations of future returns on stock investments. The GAO figure of between 7 and 8% (real returns) is representative of current market consensus.

If this general expectation were to be significantly reduced, a loss of several trillion dollars of market value would almost inevitably follow. Holders of US equities would become much poorer should there be a substantial reduction in commonly projected long-term returns on equities.

A reduction in this widely-accepted projection would also impact heavily on defined-benefit pension funds and the savings plans of millions of households.

So how is it that millions of investors have come to believe that investing in stocks will produce long-term real returns of over 7% per year? After all, no one knows what the future holds.

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In July 2006, the GAO issued a seventy page report on the Baby Boom Generation, with the headline conclusion, “Retirement of Baby Boomers Is Unlikely To Precipitate Dramatic Declines in Market Returns, But Broader Risks Threaten Market Security“.

The GAO Enters The Fray
The GAO Enters The Fray

A careful reading of this report shows that the conclusions were based on the following studies and observations by the Government Accountability Office:

  1. Many people on Wall Street who were interviewed said that there was nothing to worry about.

  2. Two-thirds of Baby Boomer assets are held by 10% of the population who the study concluded are so rich that they won’t need to sell stocks when they retire.

  3. One-third of Baby Boomers don’t have any stocks at all, so they won’t be able to influence the market by selling.

  4. Many economists performed regression analyses on past market data, while others developed simulation models of how they expected the market to operate over the next generation, and none of these experts could seem to find any provable relationship between the impending retirement of the Baby Boomers and stock market returns — with half of their results correlating to ‘unknown factors’.

  5. The Baby Boomers will retire gradually over a generation, so the impact of their retirement on the market will never be sudden.

  6. If the Baby Boomers think they are running out of money, they will just postpone retirement, get a job, or spend less, rather than sell stocks.

Thus the government has entered to fray about the Baby Boom Bomb, already noted in a previous article covering the debate between Professor Jeremy Siegel and Michael Milkin.

The GAO’s conclusion seems to be: Don’t Worry, Be Happy (Maybe).

Flaws in the Government’s Argument

Perhaps the greatest error in the GAO study is the underlying assumption that without a massive sell-off by Baby Boomers, there can be no ‘melt-down’ in equity prices.

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