Boomers’ Retirement Doesn’t Spell Bust

What happened to America’s demographic timebomb? With more and more Baby Boomers retiring every day and the birth rate declining in recent decades, many sweat the US economy will soon run out of consumer fuel. With this large generation allegedly no longer working, investing and spending, some fear boomers are about to morph from an economic contributor to a drain … and drain stock market returns while they are at it, a view so common there have been books written on it. That has long been the (incorrect and arguably ageist) narrative, and we have long taken issue with it. After all, retired folks spend money, too! A fun new report backs this up, defusing demographic worries. We think it is a prime reminder that an ageing population isn’t a stock market sinkhole.

Conventional wisdom holds that when folks retire, their spending drops. For one, they will no longer have to splash out for professional wardrobes or daily commutes, and they won’t be socializing with coworkers over coffee, lunch or happy hour. Two, once they are living off savings and Social Security, people will cut discretionary spending and focus only on the basics in order to stretch their resources over their entire retirement.

To us, this never matched a basic eyeball test. When we look around our communities and families, we see retirees seizing life with gusto—traveling, spoiling grandchildren, taking up new hobbies, organizing charity drives, hosting dinners and parties, planting gardens, enjoying their favorite local café, and so much more. Many “retirees” do so in name only, too, choosing to work in other professions they favor more. But observations like this are often unquantifiable, which is where the new research comes in.

As featured in a Washington Post article this week, Bank of America’s (BofA’s) analysis of its account holders finds: “Baby boomers (roughly ages 59 to 77) and traditionalists (ages 78 to 95) in every income group are outspending their younger counterparts, the bank found. Many of those gains were concentrated in leisure spending, such as travel and hotels. … Among younger adults, spending on airlines and hotels fell 5 percent in April from a year ago, according to Bank of America credit card data. But for older adults, spending in those categories ticked up, as they became more comfortable venturing out. In all, baby boomers spent 2 percent more in May than they did a year ago, while traditionalists spent 5 percent more — although a pullback among younger generations helped drag down overall spending by 0.2 percent.”^[i]

The article hypothesizes that the divide might stem partly from a phenomenon known as revenge spending—people making up for lost time during COVID lockdowns, doing all the activities they were restricted from. We don’t doubt it, but that doesn’t answer why older folks would be the big spenders, considering lockdowns and travel restrictions affected all ages. Yes, older folks were more vulnerable to COVID itself, but fear and care responsibilities kept many, many working-age folks indoors, too.

BofA’s analysis sheds more light on the why behind the spending divide. Not only have retirees enjoyed a Social Security bump that outstrips wage growth over the preceding 12 months, but their overhead is typically a lot lower than their younger peers, freeing up more cash for discretionary purposes. They aren’t commuting long distances, they are less likely to have big tuition bills, and many have either paid off their mortgages or their payments are tied to the low rates and lower home prices of yesteryear. Accordingly, they are much less exposed to today’s high housing costs than younger folks who are renting or covering larger mortgage payments.

The article goes on to argue this is a sign of a vulnerable economy, as overly burdened younger generations will be less able to support growth, especially as student loan payments resume. However, we don’t think any of this is new. There is a long, long, long history of economists and sociologists arguing younger generations won’t have the same economic prospects as their forebears. In their relative youth, many of their forebears posited Baby Boomers were a bunch of flower children who rejected the hard work of their parents’ generation. Reality turned out very different from that caricature, as it did for subsequent generations. Remember when Generation X were a bunch of chain-smoking, flannel-wearing, coffee-chugging slackers who would never contribute? Now they are the ones making all those high tuition payments and paying down suburban mortgages. Remember when Millennials weren’t forming families, buying houses or joining the adult world in general? Now they are entering their prime earning years and, perhaps outside of high-priced coastal metropolises, in their home-buying prime. Now that it is Gen Z’s turn in the “they can’t amount to anything” spotlight, we are quite certain the stereotypes of cash-strapped TikTokers whose pay goes entirely to rent and debt will prove equally unfounded.

To us, this is all just playing out as generational trends usually do. New grads enter the workforce in entry-level jobs, typically with low salaries, less job security and less interesting work. As they gain experience and hone their skills, the work gets more engaging, the pay gets higher, and their skills become more highly sought after. Their prime earning years arrive in middle age, just in time to fund college educations and catch-up retirement savings. Retirement itself, far from being small, is increasingly the time people do all the things they never had time for when working—things they can afford through diligent saving and budgeting while they were still working. Their spending helps keep national demand high, fueling growth.

Stocks know demographics. They know what people say about different age brackets, and they see the size of those populations. They have seen decades’ worth of commentary arguing retiring Boomers will drag on spending and growth. If it were true, markets would have priced it eons ago, resetting to permanently lower levels to account for the lack of growth potential. Instead, they keep rising—albeit with bear markets like last year’s along the way—showing us that rumors of consumer spending’s retirement were greatly exaggerated. Stocks do an excellent job seeing and weighing reality, and they are well aware that retired people are an economic force, not a hindrance.