$9 TRILLION dollars are being forced to begin exiting the stock market while Millennials are hesitant to contribute to the market. How? What happens next? The writing is on the wall.
In 1946 following WWII, America experienced a baby boom where the birth rate increased almost 45% over the wartime era. This group who was born starting in 1946-1964 and make up almost 25% of our population has made large contributions to our society. Most notably, they were the generation who fought in the Vietnam War and were the last generation subject to the military draft. This generation was also the savers who experienced the boom of the stock market from the 1980’s-2000. They are the Baby Boomers.
Baby Boomers are now entering a new era that starts this year and its Required Minimum Distributions (RMD) from Tax Qualified Plans. An RMD is a mandatory withdraw imposed by the Internal Revenue Service on accounts that deferred paying taxes. These are often referred to as Qualified Plans which includes IRA’s, 401(k)’s, and 403(b)’s. These accounts allow the participants to contribute money pre-tax with the stipulation that they couldn’t withdraw the money prior to 59 ½ but would have to start taking out money at 70 ½.
Most are familiar with the 10% penalty that comes with early withdrawals but the penalty associated with not withdrawing the RMD at 70 ½ is much steeper. A penalty of 50% will be applied to any funds that were not withdrawn that should have been taken out for that year. As you might expect this is a huge motivation for retirees to withdraw the funds from their accounts.
Most if not all of the money invested into Qualified Plans have been invested in stocks, mutual funds, and bonds. Studies say that Baby Boomers have over $9 Trillion invested in their qualified plans and 2017 marks the first year they will attain 70 ½. This means a lot of people starting this year and every year going forward are going to have to start selling off their investments.
When those who sell don’t have as many people to sell to, prices go down.
Ok, who are the buyers or new savers? Bueller?…..Bueller? My Ferris Bueller reference of Ben Stein calling for Ferris who isn’t there is about where we are now on new savers entering the workforce.
So who is the new workforce that we are dependent on to be investing in the stock market to support prices?
A millennial (also known as Gen Y or the Peter Pan Generation) were those born in the 1980’s through the first few years of the 3rd Millennia hence the term Millennial. This group represents a larger portion of our population than baby boomers at around 80 million people and are said to make up over 50% of the workforce by 2020. Millennials, in contrast to Baby Boomers, prefer a more balanced work-life compared to the more work-centric focus of the Baby Boomers.
This often times leads to the youthful generation being criticized for not being loyal as they tend to change jobs/careers more frequently in search for a “better fit”. Another major component of the millennial generation is their lack of interest to invest in the stock market. According to the Harris Poll less than 80% of them invest in the stock market, citing student loan debt and a disconnect with the financial world as their major reasons.
How does this affect me?
Unless millennials have a change of attitude or the older generations decide to reallocate more of their funds toward the stock market we are most likely going to see some downward movement in the stock market. I’m neither a prophet nor do I have a crystal ball but I did take Economics in high school and college. The writing is on the wall.
See this economics graph to visualize how price is affected by supply and demand.
How does this news affect you?
Preparation is always the best cure and news is always just news. If you find alternatives to the stock market this news will just be a car crash that you watch on TV instead of participating in it personally.