Boomers Are Disrupting Another Market

Most year to date bond fund returns have been positive. Morningstar reports that broad market bond funds returned about 2% while long term US government bond funds returned an average about 5%.

Investors today are uncertain especially in the Baby Boomer generation. When they are uncertain investors of all stripes can find shelter in US treasury bond ETFs and even investment grade bond ETFs. It is not uncommon in large market sell offs to see these types of ETFs increase in value because of a panicked market. However, the reason may not be just fear but possibly a lack of supply since holders of these ETFs and bonds are not eager to sell1. The bond market has experienced a lack of new supply that delivers a decent rate in the long term segment of the bond market. Treasuries are being issued but more for shorter maturities than longer2. With shorter maturities comes lower and lower rates.

There are numerous research papers on how much the baby boomer population has saved for their retirement. Here is a chart from the U.S. DOL3  which puts a number on retirement asset levels in certain account types for all investor generations.

Americas Retirement Assets

This chart also represents the workforce savings since 1982 when the average age of the boomer population was approximately 26. The total assets represented here is over $15 trillion in 401(k), IRA assets and pensions. The graph states that most of America’s retirement savings are in IRA accounts. Let’s say, hypothetically, that boomers own 50% of the $15.6 trillion represented on this chart. Using those numbers, boomers could have over $7.5 trillion dollars in retirement assets. Now let’s guess and say they take the safe route on 70% of those assets and invest in income producing vehicles. That amounts to roughly $5 trillion dollars which might be allocated toward some type of income producing asset. That might mean that a big amount of money is going in to the bond market in one form or another. When this happens, the low supply coupled with high demand drives interest rates down.

So this is where I believe the boomers can change the game in yet another market. They don’t have to invest in individual bonds or bond funds. They can simply invest in any type of instrument that essentially goes out and buys bonds. CD’s, Fixed and Fixed Index Annuity issuers will most likely purchase bonds with their investors’ money just as a bond mutual fund would. Allocations to products in the Fixed Index annuity market are experiencing high growth in recent years. The Boston based research firm, Cerulli Associates sees Fixed Index annuities sales growing faster than traditional variable annuity sales.  Even money markets have money invested in fixed income securities and a lot of pre-retirees and post-retirees have money markets. And the new myRA4 accounts are buying US treasuries. MyRA stands for “my Retirement Account” and it was developed by the US Department of Treasury. It is a ROTH IRA that invests in US Treasury savings bonds and the ten year return ending in 2014, as noted on the myRA.gov website, was 3.19%5. 

In my experience most retirees come to financial advisors and seeking safety and income with a little growth.  An experienced advisor will do a cash flow analysis and determine if there is a need for income in the future. Most of the time there is an income need.  Very rarely does a retiree come in and say, “Let’s get as risky as we can so I can double my account.” Actually, that has never happened to me. So with the retirement populations need for safety and income the scales are tilted toward the bond side of the equation. Couple that with a lack of long term supply and potentially $5 trillion in retirement money marching toward income producing vehicles, the baby boomers are once again poised to disrupt another market. This time it’s the interest rate market.

  1. Hold Your Treasury Bonds Close
  2. U.S. Treasury May Cut Bond Sales to Boost Supply of Shorter-Term Bills
  3. America’s Retirement Assets
  4. myRA® (my Retirement Account)
  5. myRA® (my Retirement Account)

NewBridge Retirement Advisors is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

© NewBridge Global, LLC 2016

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