One Man's Opinion

Baby Boomer Transition to Retirement

The Baby Boomer Transition to Retirement and its affect Upon The Value of Real Estate

September 15, 2005: The larger growth in family formation and child birth that occurred after World War II created what pundits began to call the “Baby Boom Generation” or “Boomers”. From 1946 to 1965 over 78 million children were born to families formed by Veterans returning from World War II and the Korean War. This compared with less than 70 million children born in the prior 20 year period and only 71 million born during the years 1965-84. The Boomer generation was the principle engine that powered the U.S. economy (and the global economies for that matter) along a half century long period of strong economic growth. Because of the special needs of the Boomers when compared to those generations preceding or following them, certain industries experienced extraordinary rise in activity followed by declines after a decade or so. For the purpose of this analysis, I have broken down the 20 year boomer generation into four lifetime segments:

  1. Birth and Infancy;
  2. Kindergarten through College Education ;
  3. Work , Family and Wealth Building, and
  4. Retirement.

The affect by the transition of boomers from one segment to the next upon our domestic and global economic mix has been like a big bubble moving along the time line. The various industries serving specific needs of each segment have experienced rapid growth and expansion for a decade or more and then more than a few are forced into rationalization of an extended or over capacity as demand for their product or services began to decline. : Probably the least upward impact upon the economy, in terms of dollars, by the boomer set came during the period when young veterans of both WWII and Korean wars began to get married and started to form their families. This period covered the years 1946 to 1964. During these years, we had extraordinary increases in that segment of the population that had basic needs of starter homes, infant needs like diaper services, toddler clothes, basic baby and child furniture, child care or nanny care and other services or products relating to starter homes and pre-school activities. But these veterans and other new young parents had modest income, were weary of debt and budgeted their cash very carefully. They spent little on themselves while buying for the needs of their children. However, many parents continued their schooling during this period in both academic and vocational institutions. Family incomes were growing but only modestly during this stage although it was the beginning of the period when both parents might choose to work. Any excess income was usually placed in an S & L or bank institution savings account with the hope that in time they might be able to buy a bigger and better home, a better car (or two for that matter), and perhaps enjoy a vacation from time to time.

Kindergarten Through College Education:

As the apex of the Boomer population began to move through the educational process, the spending for suburban housing, school construction, commercial building, the two car family, household personal property, private schools, youth sports, educational soirees, college tuition, vacation travel, music recordings and other entertainment spending increased disproportionately. Industries in these businesses began to boom between 1964 and 1983. Major changes in military technology continued as the nation’s response to the nuclear threat from Russia and the tailings from the Vietnam fiasco put inflationary pressure on prices as the Federal Reserve continued to pump “guns and butter ” money into the system. Boomers became more politically active and colleges and college students gained more and more media attention in their anti-war demonstrations. Family incomes began to accelerate as early boomers completed graduate training and broke through into higher paying jobs in technology and the industries most affected by it. Savings rose and Boomers began to invest in the stock market especially in the new tax exempt retirement programs like IRAs, 401Ks and corporate funded defined contribution plans. Families poured money into their children’s teenage years with college prep costs, foreign travel, their own car, fancy vacations, foreign exchange and other educational programs. Growth in Industries serving the needs of boomers making expenditures in these areas exploded. Midway through this period, a critical change in tax policy, both state and federal, took place, –the state of California enacted the Jarvis Proposition in 1978 and the Reagan Presidency introduced the Federal Income Tax Reduction act of 1981. These two changes in property and income tax law set the stage for explosive growth in the economy and comparable increases in family net worth.

Work and Wealth Creation:

From 1984 to the present, the Boomer generation bubble has been going through segment three, work ,family and wealth building. Steadily increasing economic growth and declining inflation pushed real incomes up rapidly and savings and investment exploded. With the expenses for raising and educating their children beginning to peak in the early 1990s, boomers were able to turn their attention to investing excess income cash in the stock market or buying bigger and better homes, one or more luxury cars, fancy vacation travel, fine art or deco art, exotic entertainment, etc. Stocks and Home prices rose sharply as a result of many variables including dynamic growth in technology and inflationary price appreciation and due to the boomer generation’s size along with secular declines in interest rates during Paul Volker’s rein at the Federal Reserve. High Technology and the increases in productivity resulting from it drove corporate revenue and profits and family incomes followed. Huge wealth was created from holdings in stock options (but only prospectively) as the consequence of corporate management’s using soft dollars to compensate mainstream employees as well as executives. The use of these options, profit based stock issuance or other derivatives, generated higher cash flows for corporations to go on acquisition binges or just expand their operations. Stocks became the retirement funding vehicle of choice replacing government or corporate bonds, and life insurance products such as annuities. In 1990 there were 470 mutual funds registered with the Security and Exchange Commission of which only about 200 were equity funds. By the year 2000 this number had risen to over 5000 and 3500 funds respectively. The Boomers were investing and speculating with vigor and the flow of assets allocated to corporate pension and retirement accounts contributions were being matched in many cases with improved programs like 401k and super IRA accounts. Medical science extending life expectancies so that even with smaller family sizes of the Boomers, along with growing immigration, the population increased. This growth along with the more secure living environment provided as a result of the fall of the Berlin Wall and the breakup of the Soviet Union added multiples of 2 to 5 times corporate earnings to stock prices. The back of inflation had been broken by Paul Volker’s austerity at the Federal Reserve in the 1980s and interest rates dropped to levels not seen for many decades. The continued conservative efforts of Alan Greenspan, at the Federal Reserve kept real economic growth in a positive trend. The Boomers felt more financially secure and felt comfortable allocating a larger than previously considered normal ratio of disposable income toward home mortgage debt service. Toward the end of the work, family and wealth segment, most boomers have acquired a primary residence and some had purchased second homes in a resort area or in anticipation of retirement. The 1980 inflation period along with ever upward and onward willingness of boomers to assume more consumer and mortgage debt leveraged perceived equity in real estate even on modest price appreciation and this fed the fuel for even higher valuations of both stocks and real estate. With liberal appraisals of home values by mortgage lenders, many boomers have monetized the increased equity in their homes by refinancing. The lowest interest rates in decades along with ample funding of mortgage loans by institutional investors has allowed Boomers to ratchet up life styles, speculate in securities, upgrade their homes or, at the least, maintain funding of steadily increasing occupancy costs of their present residences. We are now coming to the outer edge of the Boomer generation work, family and invest life segment. At this point, Boomers will soon begin their transition into the retirement stage. What will be the economic consequences of 78 million people retiring thereby reducing the work force continuing in place over the coming twenty years?

Retirement :

From now until 2024 or so, the transition of the Boomer generation from the working segment of society to retirement could have extraordinary impact upon the U.S. and World economies. Just how will that effect look and where will it take place? This is all speculation but I believe that certain assumptions are reasonable and should be taken seriously by those who’s future economic security depends on being right or mostly right regarding this issue. The question that needs to be answered is: how will the transition of Boomers from working mode to retirement affect the domestic or global economies ? Will it cause any significant change in the level of their average consumer spending? Will their purchases of personal property slow or change enough to affect specific industries? Will this transition have a negative impact on the stock of certain companies while causing others to do better? How about small businesses? How about residential real estate? Will the Boomers be able to convert the equity in their homes into more income oriented assets in order to provide support for their retirement life styles? If so, are the next generation’s requirements sufficient to sustain valuations

One Man’s Opinion– Bud Brewer