What happens when the Boomers retire?

When I was a teenager, I read an article about investing for retirement.  Then I read an article about how huge the Baby Boomer generation was, and how their retirement would create massive changes.  And I thought, what happens to the stock market when all those Boomers withdraw their savings?

Now the first Boomers are retiring.  Some are downsizing their homes.  Some are selling their stocks.  Some are selling their Lexuses (lexi?).  As more Boomers retire and face the reality of retirement shortfalls, it will deeply impact everything from healthcare to rents, even divorce

Interesting article on WSJ. Bad News for Boomers  "The problem in a nutshell: The ratio of retirees to active workers in the U.S. will balloon. As retirees sell stocks and then bonds to support themselves, there will be fewer younger investors to buy those securities, keeping a lid on prices. Meanwhile, strong demand from boomers and a limited supply of workers will boost the prices of goods and services the boomers need."

For us younger folk, we may need to tap dance a bit to keep our 401ks ahead of Boomer moves, but, ultimately, it may be better to shift to self-directed IRAs where we can invest in means of production rather than just trading stock certificates.  As I house-hunt, I avoid "move-up" houses because I don't have a confident view of where future "move-up" buyers will come from.  Boomers consolidating households with adult children, perhaps, but those adult children come burdened with high student loan debt while Grandma and Grandpa are burdened with low savings.  Right now, I would rather own a duplex than a McMansion.

The inflation/deflation debate probably oversimplifies.  Population growth, currency devaluation, and international trade will likely create inflation in basic necessities ($5/gallon milk) while creating deflation in low-end luxuries and, curiously, inflation in high-end luxuries as the burgeoning super-rich class competes for the gauchest status symbol.  French Laundry is raising prices, and the haute couture fashion houses remain in business.  But middle luxury is more dependent on an optimistic middle class.  Baby Boomers with a ways to go before retirement feel pretty rich - a half-million-dollar portfolio feels pretty wealthy, until you learn about the 4% withdrawal rule and realize it's only $20,000 a year to live on, safely.  But facing layoffs and realizing that employers discriminate based on age takes away a lot of optimism.  Saving for your kids' college while paying off your own student debt is a downer, too.

The wildcard is inheritance.  Americans are notoriously bad at teaching their kids about finances.  If Boomers aren't teaching their kids about the sacrifice necessary to accumulate a nest egg, dropping a quarter mil in the kids' laps when you die is a great way to get the kids a new car, but not such a hot way to get them financially secure.  I've talked before about the psychology of money.  Money is just a bunch of numbers until you have a frame of reference for it.  Saving gives us a frame of reference - i.e., I have $500 in the bank, it took me 6 months to save that much, therefore $500 is a lot and $5,000 is a whole lot.  Without savings, our frames of reference are more arbitrary - our annual income, our credit limit, the median salary, a Trillion dollars in new debt.  Those frames of reference are disconnected from consumption.  A $50k salary is not $50k in spending money - it is $50k minus taxes, commute costs, work clothes, food, shelter, tuition, etc.  If Grandma leaves me $10,000 and I think $5,000 is a whole lot, I can blow $4,000 and still have a whole lot.  If Mom leaves me a quarter million and I have $50k in my 401k, I can blow $100k on a kitchen remodel and still have "a lot" left.  I may be 55 and woefully underfunded for retirement, but I don't know it and I do know I hate my kitchen.  So we may see pockets of luxury spending due to inheritance.

It's not all gloom and doom, though.  Us smarty-pants might find better job opportunities as mandatory retirement ages, failing health, and voluntary retirements create a brain shortage in the workforce.  Then again, we may find immigration growing to fill that gap.  Now may be a great time to learn another language or three.

I think we're facing a new frontier in finance-ku, the art of economic self-defense.  For us younger old folks, following the old rules may just stampede us off a cliff.  But I'll tell you one thing - my house hunt includes a lot of independence provisions.  Room for a garden (grocery-fu), space for an accessory residence or a floorplan that allows for duplexing (rent-fu), proximity to transit/services (gas-fu), and, above all, affordability (savings-fu).  I get why people are anti-home-buying right now, but, for me, the crystal ball is a little murkier.