January 2008

At one second past midnight on New Year’s Day 1946, Kathleen Casey-Kirschling was born in Philadelphia. It was no ordinary birth: Ms. Casey had the dubious honor of being the first member of the nation’s iconic baby boom generation.

She would soon have company. Lots of company. During the next 18 years, there would be 76 million baby boomers, making it the largest generation in U.S. history.

How times flies. This month, Casey-Kirschling attained another milestone when she became the first boomer to become eligible for Social Security. For the next two decades, an additional 10,000 boomers will retire each day.

Not everyone agrees with the designation of the years 1946 through 1964 as the baby boom, since the nation’s birthrate actually peaked in 1957 and declined significantly thereafter. But however you define it, the looming retirement of fully one-quarter of the U.S. population will have important investment implications.

Stocking up
Typically, retirees convert a significant portion of their money from stocks to bonds. That helps to preserve principal and generate the income they need to replace lost wages.

If baby boomers followed that same pattern, stocks could face a mild headwind over the next decade while the fixed-income sector would benefit from increased demand.

But true to their iconoclastic past, boomers may break the time-honored mold of the conservative retiree.

In part, that’s because the initial wave of baby boomers already is relatively conservative with its investments.

“The early baby boomers hold a significant portion of their portfolios in large-cap stocks,” notes Bob Falato, senior vice president, Northern Trust Securities, Inc. “So with respect to their equity exposure, they’re already investing somewhat conservatively. That probably won’t change after they retire.”

Many factors affect stock prices, but the clear preference for big company shares among older boomers could suggest that large stocks will continue to be in demand as the first wave of boomers retires during the next few years.

Of course, baby boomers are not a uniform group. Some experts divide the generation into two segments: boomers or “leading-edge boomers” (born from 1948 through the mid-1950s) and “shadow boomers” (born between the mid-1950s and 1964).

Given their different backgrounds — the immediate post-war period was quite different from the early 1960s — it’s not surprising that each segment invests differently.

“The youngest segment of boomers is a little more aggressive,” Falato notes, “so they hold a greater percentage of small-cap stocks.” But since most shadow boomers won’t be leaving the workforce for another decade, small-cap shares shouldn’t be affected by any great wave of boomer selling any time soon.

Playing from behind
Falato cites another reason overall demand for stocks might remain high even as more boomers reach retirement age.

“Most baby boomers have not saved as much as earlier generations, so they’ll need to keep their investments growing at a faster pace,” he says. “Historically, investing in stocks over the long term has put you ahead of inflation.”

There could be plenty of catching up to do.

A recent study found that 27.8% of baby boomers had amassed less than $10,000 in savings (not including the value of their primary residence) and 61.2% had less than $100,000 put away. Even those numbers might overstate the amount of savings done by boomers themselves, since a staggering 41.7% of those without a defined benefit pension — a type of retirement plan in which the employer not the employee makes most of the contributions — had less than $10,000 in savings.

Increased longevity combined with nearly empty piggy banks suggests that boomers will need to keep a bigger portion of their investment assets in stocks than did their parents. Falato also thinks that many boomers might need to continue working in some capacity even after leaving their full-time jobs.

“They might not be working full-time or even in the same field, but when you haven’t saved enough you might be forced to supplement your retirement income.”

Healthy choices
But investment preferences aren’t the only way the graying of the baby boomer generation will affect financial markets. What boomers buy will have an equally large impact. These four areas are positioned to benefit from demographic changes:

Health care. Falato expects demand for healthcare products and services to rise as boomers age. Specifically, biotechnology, HMOs and pharmaceutical companies that focus on pain-management medications could be well-positioned to meet boomer demand, Falato says.

Personal finance. Financial institutions — like brokers and money managers — will be needed to help boomers get the most out of their savings. Notes Falato: “Financial advisors who listen to their clients and take the time to understand their goals and tolerance for risk will be in great demand.”

Adult education. The for-profit education industry could see a spike in demand as boomers learn new skills necessary to remain in the workforce or just use their spare time to expand their intellectual horizons.

Leisure. Given their well-earned reputations as unabashed consumers, don’t expect baby boomers to stay home and eat TV dinners. They’ll travel and eat out, which should be good news for the spirits and leisure industry. “Those habits are not going to change,” Falato says.

Don’t try this at home
While boomer retirements will present new opportunities for investors, cashing in will take patience, skill and a well-polished crystal ball.

Whatever changes in demand for products and financial assets are caused by the aging of the massive baby boom generation will occur at a glacial pace. Even within industries that will benefit from the process, there will be winners and losers among individual companies.

That implies that investors should not try to ride the wave without some help.

“In all walks of life, Americans hire specialists to handle complicated and important tasks,” Falato says. “If you have heart trouble, you don’t operate on yourself. You see a cardiologist. It’ll be the same way working with financial advisors to get the most out of your retirement savings.”

During the 62 years since Casey-Kirschling entered the world on a winter’s night in Philadelphia, she and the 76 million boomers who followed have made a profound impact on their nation’s political and cultural life.

As the “silver tsunami” approaches, get ready for perhaps the greatest impact of all.