How Will the Boomer Wave of Retirement Impact the Market?

by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.
July 31, 2008

As baby boomers start to retire during the next five years, we will begin to see how America's largest generation will redefine the concept of retirement. Amid concerns about the current market environment and doubts about global economic strength, Schwab sought to understand how Americans across four generations—baby boomer, silent, Generation X and Generation Y—are thinking about their later years and how to finance them.

Survey respondents had a lot of questions, and some were even concerned about a "mass exodus" out of the stock market as our baby boomers embark upon their retirement adventure and draw on the assets they have saved and invested during the years.

Here are some of the most popular questions:

How do I prepare for retirement?
What can I do to make sure I can retire in the lifestyle that I've always envisioned?
How should I have my assets invested now that I'm closer to retirement?
How do I know what retirement income strategy to choose?

Rethinking retirement
First, we have to look at how retirement has changed—and will continue to change. Because each generation approaches retirement differently, Schwab recently commissioned a study across four generations to examine these differences.

Many respondents look forward to a radically new kind of retirement—one that includes working for the purpose of keeping mentally active rather than solely to generate income. Of the respondents who would continue working once they've qualified for retirement benefits, many said that they would pursue an entirely new field, perhaps one more aligned with their passions.

Chart: Report Card

Help us help ourselves
As much as respondents voiced excitement at the prospect of retirement, they also expressed concerns regarding how, exactly, to ensure that the retirement of their dreams will be the retirement of their future. Many respondents feel ill-equipped to manage their finances in preparation for retirement. They are disappointed by the financial education resources available—peers, family, schools and even financial advisors all received poor grades.

Survey participants demand more financial information and counseling to help them help themselves. Yet, in spite of an inadequate system of financial education and the resulting lack of financial savvy, they are incredibly optimistic and are eager for advice. In true American spirit, they're asking: "Help us help ourselves."

Survey respondents themselves call for further financial education: 95% across all generations said that basic financial management should be a standard part of our high school curriculum. People would like educators, employers and national policymakers to engage more in the subject and to help them become more financially knowledgeable and responsible.

Key findings

Only 3% of those surveyed strongly agree that Americans are a financially responsible population.
Survey respondents say the average person will need to have saved $500,000 (median response) to live comfortably in retirement—twice the median net worth of today's pre-retirees.¹
With each succeeding generation, a pronounced shift in mentality toward more financial self-reliance for funding retirement is evident. Gen Y respondents anticipate that 61% of their retirement funds will come from personal savings and investments, 19% from Social Security and 21% from employer pensions.
Gen X respondents also anticipate having to be almost as financially self-reliant: They expect 53% of their retirement funds to come from personal savings and investments.
70% of those surveyed would like their employers to provide professional advice regarding saving and investing. This number is highest among Gen Y respondents, with 79% in favor of this option.
Gen Y respondents believe that it is five times more likely that the North Pole will melt in their lifetime than they will receive the same level of Social Security benefits as today's retirees.

Chart: Approximately What Percentage of Your Retirement Funds Will Come From the Following Sources?

How will boomer retirement affect the stock market?
We often receive questions about the impact of the boomer retirement wave on the U.S. stock market. During the next five to 10 years, America's largest generation will turn to their 401(k) plans and other invested assets. What impact will this supposed mass exodus from the stock market have?

Some key findings from the study, as well as some recent developments regarding 401(k) enrollment, lead me to believe that systems are in place to cushion the blow. Gen X and Gen Y have already started to prepare themselves for the changes that will occur as boomers reach retirement age. Thanks, in part, to employer-provided contribution plans like 401(k)s, Gen X and Gen Y started investing at a younger age than the baby boomer and silent generations. This alone provides some offset to the outflow expected from boomers.

Consider the wide age range of baby boomers: I'm a boomer and represent the youngest year of that generation. But, someone nearly 20 years my senior is also a boomer, and that alone suggests the pace of retirements will be spread out over many years, which will mitigate the moment-in-time impact on the stock market. Combine that with the work/leisure life balance that many boomers expect to enjoy—and life expectancy that continues to expand—and you have the recipe for a smoother adjustment for the stock market than conventional wisdom might suggest.

Retirement longevity gap
A fascinating nugget from the study sheds a lot of light on the issue. According to Schwab's study, respondents don't consider themselves "old" until much later in life—10 or more years after retirement age. We call this a "retirement longevity gap"—the period of time between retirement and the point at which people see themselves as entering "old age." Even in retirement, they see themselves as active, contributing members of the community well past the life stage that used to define "old age."

Chart: At What Age...

This attitude is a positive for people thinking through their retirement financial strategies. People transitioning into retirement will likely keep working rather than relying solely on their retirement assets. My advice to people transitioning into retirement is to use your assets as a cushion or a safety net while you take an opportunity to explore an exciting field of work (even part time) that has always intrigued you. During the main earning phase of your career, you might not have been able to "afford" to do that given the pressures of mortgage payments, college tuition, child care and so forth. Now that many of those expenses are behind you, you may find that you have more freedom to think creatively about your next phase in life.

The implications of the retirement longevity gap are quite positive for those who haven't retired yet. It's conceivable that there won't be an incredibly disruptive rush among the retired to cash in their 401(k)s. Instead, retirees may be more likely to opt for annuitizing certain types of plans, which will help provide more steady streams of income (akin to a monthly paycheck), during a period of reduced work income.

Automatic 401(k) enrollment
Thanks to the 2006 Pension Protection Act, companies are now able to institute automatic 401(k) enrollment, thereby increasing the number of plan participants—and getting workers started at a much earlier age. For Gen X and Gen Y, a greater percentage of the workforce is auto-enrolled in 401(k) plans and therefore will continue to be more invested in the future of U.S. markets than previous generations. According to a 2001 study² of one 401(k) by Brigitte Madrian of Harvard and Dennis Shea of Penn State, automatic enrollment lifted participation rates for new hires from 65% of employees after 36 months on the job to 98%.

Gen X and Gen Y interested in investing
Schwab's study shows that Gen X and Gen Y have a very strong interest in investing, and are more inclined to be involved in the stock market to begin with—even apart from their retirement planning.

40% of Gen Y and 43% of Gen X said they "enjoy investing, checking [their] investments, and even making [their] own trades" (compared with 40% of boomers and 37% of silents).
47% of Gen Y and 44% of Gen X said "investing wisely" will be extremely important to achieving financial security in their retirement (compared with 32% of boomers and 25% of silents).

As always, if you have questions or need help, please contact your Schwab consultant. If you're not yet a Schwab client but would like to learn more, a Schwab consultant can help. Call 800-435-4000 to get started.

For more information
More information on the study is available at http://rethinkingretirement.schwab.com along with a self comparison tool and an ongoing series of cross-generational discussions on retirement. A comparison tool is also available for download if you would like to integrate content of the study to your Web site, blog or social network.

About the study
"Rethinking Retirement" was initiated by Schwab in collaboration with Age Wave. All data collection and analysis was conducted online within the United States by Harris Interactive. A total of 3,866 interviews were conducted between March 28, 2008, and April 22, 2008. The sample is representative by age, gender, race, income, investable assets, education and region for each of the four generations studied. An oversample was conducted by generation among the major non-White ethnic groups (Hispanics, African Americans and Asians) to ensure adequate representation by ethnicity across all generations. No estimates of theoretical sampling error can be calculated: A full methodology is available.

1. The Federal Reserve 2004 Survey of Consumer Finances.
2. "A Political Plan to Help You Save More," by Stephen Gandel, Money, July 24, 2008.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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