|
As retirement age approaches for the baby boomers, a debate is stirring about the effect that their exodus from the workforce will have on the stock market. After all, baby boomers have received a lot of credit for the astounding strength and resilience of the market. The savings of 41 million generation X-ers won't fulfill the demands on the system made by 76 million baby boomers, whose effects on society have ranged from increased school construction in the 1960s to spiraling housing prices in the 1990s. Logic has it that the stock market will go into freefall, but that is not what Stanford economist John Shoven predicts. "The retirement of the baby boomers will have a mildly depressing effect on the market, but we are not going to have a replay of the 1970s, much less of the 1930s," says Shoven, the Charles Schwab Professor of Economics and an expert on national savings, Social Security and retirement planning. The predicted Great Boomer Bear Market of 2011, when the first of America's boomers hits retirement age, will only be a little bear, he says. By carefully analyzing scenarios that broadly apply to high- and middle-income households, Shoven provides general insights into the changing retirement planning picture and finds reasons to doubt that stocks and other assets will have a catastrophic performance. His study includes changing tax laws as well as market conditions, and examines future money inflows and outflows from pension funds including 401(k) plans. At the same time, some caution is recommended: The impending exodus of boomers from the work force is a reason not to go for the most optimistic approach when devising an investment strategy for retirement. Good advice is necessary. Unfortunately, studies show that workers already face hardships getting sound advice about investing their private pension dollars. According to the Business School's William Sharpe, the STANCO 25 Professor of Finance and winner of the Nobel Memorial Prize in 1990 for his work on reducing the risk of investments, the software programs that at one point appeared to be an objective way to see the financial future with clarity are not reliable, because they admit no doubt. A legitimate complaint about the analyses many advisers and computer programs provide, Sharpe says, is that they assume stocks will earn annual returns of a particular percentage and bonds will earn at another slightly lower rate. In the real world, returns fluctuate, creating uncertainty. Sharpe has created a web-based pro gram to give individuals in 401(k) plans the same sophisticated portfolio tools used by managers of billion-dollar pension funds. Financial Engines is available to individuals whose employers subscribe to the service. According to Sharpe, the difference is that his program builds some uncertainty into its forecast. It uses rigorous mathematical analysis to maximize the chances of achieving an optimal return on investments, given an individual's retirement income goal and his or her willingness to accept the risk of undershooting the goal. Visit http://www.financialengines.com.
|
