Powerful demographic trends will impact investment markets starting very soon.
The demographics behind these trends have been in place since 1946, but their potential for disruption is often ignored while more short-term factors are studied.
How will the rapidly aging population in the developed world impact financial markets?
I wrote about this as it relates to residential real estate in the second edition of “When the Bubble Bursts”. As people reach 65 years and beyond, they become sellers of housing, especially larger single-family homes. They move into rental accommodation, they move in with their children or they move to seniors’ housing. Or they just pass away.
Already the need for money in retirement is affecting the world of finance. The current low interest rate paid on government bonds could be caused by an increase in demand for investment income in retirement. That trend will only get stronger over the next decade and beyond.
Pensions (defined benefit plans) are starting to see more money paid out to beneficiaries than is contributed. On March 13, 2019 Statistics Canada reported the results for all Canadian corporate-sponsored plans. The period of net outflows has begun, as revenues for all employer-sponsored plans was $14.9 billion while pension payments were $16.3 billion. For now, the shortfall is covered with investment income but that will be more and more difficult, depending on investment returns.
The Canada pension plan is similar, with a shrinking number of contributors and a growing group of pensioners. The CPP has just about reached that milestone where more money is paid out than is contributed. Starting in 2021 funds will be paid out from investment income to cover payments.
Source: Canada Pension Plan Investment Board – 2018 Annual Report
According to Raoul Pal of Real Vision Television www.realvision.com in a May 2018 report, “The Coming Baby Boomer Retirement Crisis,” there will be a serious problem created in the investment world as baby boomers enter their retirement years. The argument is that boomers who were relying on stock market gains and have failed to save enough money for retirement will become aggressive sellers. Pal is focused on the U.S. market, but Canada is similar.
Pal suggests that the stock market will suffer when boomers need to sell, like the Canadian housing market. On top of that, as we saw with pension plans, institutional money managers will have to withdraw money to make up the shortfall from contributions. Like baby boomers, pension plans have also been significant investors in real estate and the stock market, but they will be forced to shift more funds out of those risky investments to safer, fixed income securities.
Life expectancy is rising and costs of living for the elderly are soaring. I have clients that are paying over $4,000 per month for a 1-bedroom apartment with meals in a retirement home. For full care in a nursing home costs can go up to $8,000 and higher.
Also, as boomers retire and have less income, they will cut discretionary spending. Their willingness to spend on houses, autos, furniture and other consumer durables will disappear as they start to worry about their retirement income. This will affect the consumption portion of GDP, which is the largest component at 65-70 percent.
The impact of the next recession will reinforce the trend to a more defensive attitude, as retirees and those close to retirement age become more cautious.
This will create a buying opportunity in the stock market, and perhaps real estate, as stock market prices decline with all the new supply from baby boomers who need to liquidate their investments to support living expenses.
While it will be painful for the baby boomer majority, it will be a fantastic buying opportunity for the smaller number of people in Generation X and Generation Y who have money saved for investment.
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