Retirement:Only the Little People Sell Their Stocks

Remember the theory that the stock market would tank as Boomers began to retire and sell their stocks? Seems pretty silly these days, as the Dow flirts with new highs.

In a recent Wall Street Journal column, Michael Milken explains why the theory had more leaks than HP:

Baby boomer asset liquidation isn't really a financial market issue because (1) there's plenty of liquidity in the global economy; (2) as the rest of the world becomes wealthier, people outside the U.S. will own a greater percentage of global assets and they'll want to keep a share of their net worth in America; (3) liquidity will grow in both developed and developing nations as they adopt recent American financial innovations and market structures; (4) as baby boomers live longer and healthier, their new mantra will become "Who wants to retire?" and (5) most assets won't need to be sold.

The Federal Reserve reports that the wealthiest 5% of American households own about 60% of the nation's assets. Ninety percent of all stock is owned by 10% of investors. Debate continues about how this concentration of wealth affects our society, but what seems irrefutable is that the owners of most wealth will have no urgent need to raise cash. A retiree with a $10 million net worth doesn't sell stocks to buy groceries or pay the mortgage. He can easily live on dividends and interest while preserving assets for his grandchildren or a favorite charity. And if wealthy retirees don't sell their assets, they won't put pressure on valuations.

In other words, only the little people (the same people who paid taxes so Leona Helmsley could skip hers) need to sell their stocks. The need arises from the fact that they'll be spending their modest nest eggs fairly quickly, on travel or perhaps a retirement business.

According to another WSJ story, Pitching 401(k)s To Generation Y, it is true that stock and bond investments held in 401(k) plans are being liquidated:

Investors are now taking more money out of retirement plans than they are putting in, according to Cerulli Associates, a Boston-based financial research and advisory firm. Using its own analysis and trends identified by the Department of Labor, Cerulli estimates that in 2005, investors made $5 billion in net withdrawals from these plans and the outflow will increase to $39 billion in 2010.

But, of course, most of that outflow belongs to Big People and is simply being rolled over into new investments.

Marketing note: As you can see, “retirement investing” comes in two very different forms:

The Little People need to be in stable investments when they reach their retirement date, so they can cash out at short notice.

The Big People, the HNWs, need an investment program heavily weighted toward equities, so that their capital will generate an income that grows with inflation for another quarter century or more.