One of the most interesting anomalies in America’s recent history is the “Baby Boomer’s” as a generation. This trend is widely agreed to have started in the post World War II era as 1946 was ushered in with the return of the servicemen from the theaters of war abroad. As these newly minted young men (many of whom where boys when they set out) returned to lead a procreation cycle which would last an amazing 18 years until about 1964 when birth rates finally declined to less than 4 million marking the low in the cycle.
One of the sociological questions is why did it take roughly 10 years for the boom cycle to build its head of steam as the years from 1952 to 1957 saw the peak of the sinusoidal “apex”. While there might be many answers, as in the delay of job creation, housing development or other social-economic drivers. Also what drove the decline once the apex was reached in 1954? In short, the point is this was one of the first “social viral expansions” as not only did it mark a change in the raw birth rate. It also drove a change in sociological “norms” and “laws” to redefine a nation.
Why is all this important, as it seems like just some statistical mumbo jumbo however as this post is written, after about every sentence (technically 7 seconds) another boomer will turn 50. This means the original social viral expansion loop (VEL) is once again set to create a major impact. As roughly 29% of America’s population is a Boomer, which means there’s about 75,000 in the workforce now with the “apex era” at around 57 years of age. This is significant, as this generation was the greatest wealth creating generation America has ever seen.
With that said this same generation is posed to be the biggest consuming generation on the way out (by the way us tail Enders [60 to 64] are screwed) as the passing of the boomer’s to retirement and the hereafter will create an economic tsunami the likes of which we have never seen before. Where to start the story then?
First let’s start with the fact that in the United States we have a magic age, that is 59 and half (go figure on the 1/2 as it’s a government thing) where one can start drawing down money from “qualified plans“, for those abroad these are “retirement plans” where during our working years we got to invest our money with the government provided benefit of delaying taxes (which is a bit of a sham, but to far outside for this ramble). Now as mentioned above, the bulk of the “apex” Boomer’s are sitting at 57, so that means we have about 2.5 years before the big withdrawals start happening.
Now, as with most things there will likely be a little lag in the timing, however as this money is drawn from investment devices, ask yourself what happens in a supply and demand economy? Yes Virginia, prices will decline which will mean an even faster expatriation rate and so on. So in short we could see viral downward markets* in the next 3 to 5 years. Next as if this wasn’t enough, we will have to pay taxes on those funds we take out and guess what the mortgage will be paid off the kids gone so in essence we will be paying some of the highest pro-rata tax rates of our lives!
This will again add fuel to the viral fire as most people who might be sitting on a million or so dollar nest egg have forgotten about the tax issue. Also over the time you’ve paid in [to the retirement fund] the overall tax rate hasn’t gone down, it’s actually risen per-capita. So in short it will keep rising so all along this has been a false economy and yes your Uncle Sam has his eye on those dollars the American people have squirreled away for the golden years to pay down the national debt (so you have a right to be worried) second this little issue of QE 1 & 2 where the current administration has decided to print more money.
Do you as a Boomer realize every time they do this, the money we have worked so hard to save will be “worth” that much less (percentage wise)? Scary stuff to say the least; however what will also happen is when this loop starts with decreased markets values, increased taxes and decreased currency valuation of saved moneys. We will also see the end to what I have come to call “generational bleed” as those offspring of the boomers have not had to work as hard at value creation as their parents have, as the parents created enough effluence to allow bleed over to the next generation while the prior was still alive rather than using “death inheritance” as the pre-boomer generation did to pass wealth. Also yes by doing this, we’ve been stealing from the government a bit as they haven’t collected the estate (death tax) as they normally should or would have. This means just as pointed out above tax rates will increase and watch out as they will also [the Government] accelerate the required withdrawal cycle too. Then the investor, you in most cases will also start taking more money out to pay the taxes as the loop speeds up.
Also before anyone writes me, international money isn’t going to pour in and save the markets, as no one wants to be here are as we have imposed so many restrictions we have strangled business with laws like SOX and FASB, etc. All I have to say is post the mortgage melt down we should have tossed out SOX as that just proved (as Buffett has said for a while) it only adds over head with no extra value.
However rambling aside, there are dark clouds looming on the horizons and I am not here to give advice, just a word of caution and a call to action to understand what is happening around you.
*Note: On the surface one might say that the money coming out of investments will return once it’s spent. However the fact of taxation and national debt will mean that not all “can” come back thus incurring additional financial friction. As keep in mind, when the federal government taxes and takes that money to pay the bond holders of the national debt (typically China). This money is leaving our system, thus what leaves won’t typically come back.