At long last, the boomers begin to retire

The bull market has restored confidence. But do they have enough saved up?

May 23, 2014 @ 12:01 am EST

Dee Dix hesitated before she decided to retire in 2012.

“I thought, do we have enough money? How much do we need?” the 66-year-old former insurance analyst said from her home in Fort Myers, Fla. “I was a little bit leery.”

Clinching the decision was profit earned on stock investments during a five-year bull market that has restored $14 trillion to U.S. equity values. Ms. Dix is among millions of baby boomers whose retirement has helped push the participation rate of working Americans to lows not seen since the 1970s.

Some people leave the labor pool and retire after giving up on the job search. Others, like Ms. Dix, pay for it with the proceeds of rallying stocks. Joblessness and labor participation levels reaching pre-recession lows are stoking debate among Federal Reserve policy makers and politicians about what's behind the swings in data underlying the most important economic barometer, employment.

See: 10 Secrets to Social Security

“This issue of participation in the labor force is a highly contentious one,” said John Ryding, chief economist and co-founder of RDQ Economics in New York. He has also worked at the Federal Reserve Bank of New York. “This is not some abstract discussion about sociology or demography, it's really a discussion about interest rates. The stakes are huge.”


What's not in dispute: the sheer size of the aging baby-boomer generation and that an unprecedented demographic shift distorts statistics. It means, for instance, that retirees can play a significant role in the shrinking labor force even as people are staying on the job longer than ever. About 8 million people aged 65 and older are working, a 72% jump from a decade ago.

It is the sharp rise of departing retirees from the workforce in the past two years that suggests more is at play, according to an analysis by Shigeru Fujita, a senior economist at the Federal Reserve Bank of Philadelphia. While demographic trends have headed this way since about 2000, retirees became a more prominent block of the drop in the participation rate in 2010, and then grew to account for 80% of the decline since early 2012, he found.

Last year's 30% surge in the Standard & Poor's 500 Index capped a bull market now in its sixth year, while the benchmark gauge reached a record high this month. Wealth has trickled into 401(k) accounts and home valuations, tempting those who may have delayed retirement during the financial crisis, said financial adviser Jay Barish.

“Everyone understands that the market went crazy last year,” said Mr. Barish, who advises 155 clients as a partner at Murphy Matza Wealth Management in Raleigh, N.C. “If they're not in love with their career, the natural question is, 'Can I go?' That emotion absolutely ebbs and flows with a client's perceived bottom line.”

The U.S. jobless rate fell below 7% at the end of last year for the first time since 2008, helped by an exodus of retirees that has shrunk the labor force, Mr. Fujita wrote in his analysis, revised in February. Unemployment dropped even further in April, to 6.3%.

Since the start of the bull market in 2009, the number of those 55 and older leaving the workforce has increased by more than 2% each year, the fastest clip since the technology bubble of 2000 and outpacing a 10-year average rate of 1.3% through 2008, according to the Bureau of Labor Statistics. In 2008, growth for the same age bracket was 1.4%, a slower increase than the previous year's 1.7% gain, the data show.


Those numbers dovetail with the broader economic recovery, prompting Drew Matus, deputy U.S. chief economist at UBS Securities, to posit that boomers put retirement plans on hold during the depths of the financial crisis and have been revisiting those plans since.

Household wealth in the U.S. climbed by $2.95 trillion in the final three months of 2013 to an all-time high. Average 401(k) balances almost doubled from 2009 to reach a record $89,300 last year, with 78% of the annual increase due to the stock-market rally, according to Fidelity Investments, the U.S.'s largest provider of 401(k) retirement assets. For pre-retirees 55 and older, the average balance was $165,200, Fidelity said.

“Sometimes people like to make the economy more complicated than it needs to be,” UBS's Mr. Matus said. “People are focusing on those stock-market gains they've experienced, they're finally getting the prices they want for their house, they're saying, 'If I need to, I can go back to work, but right now I'm going to enjoy life.'”

While Mr. Fujita acknowledges the economic backdrop surrounding the data, he wrote that “further careful analysis would be required” to verify his theory.

His paper prompted Alicia Munnell to do just that. Ms. Munnell, director of the Center for Retirement Research at Boston College, said she was intrigued by the phenomenon and wanted to look closer at labor participation by each age group.

In her own paper on the topic published in February, Ms. Munnell wrote that the stock market had nothing to do with it. Baby boomers were born between 1946 and 1964, when a jump in birth rates followed World War II. As each year passes, the demographic inches along into older age slots that naturally have lower workforce participation.


“The explanation is: Boomers are aging. That's it,” Ms. Munnell said by phone from Boston. “It's due to the shift of more people into these low-participation age groups. This is all explainable by demographics.”

Stock market gains haven't helped everyone. Those who want a job but have given up looking reached 783,000 in April, almost triple a low in 2007. That figure has remained stable since the beginning of 2012, ruling it out as a key factor behind the drop in participation rate, Mr. Fujita said.

Further complicating matters: Stock holdings are concentrated among the top 20% of the wealthiest boomers, who have 96% of all the equities owned by the group, according to a report by Daniel Wallick at Vanguard Investment Strategy Group. Those benefits can be felt by everyone, even if they don't necessarily see the same returns, says Mr. Wallick.

“There is a behavioral-finance element to all of this,” said Mr. Wallick, a principal at Vanguard. “If the dollar amount in your 401(k) goes up, even if it's just a little bit, and your house price goes up, there is this general wealth effect, and people feel more secure. There is a psychological element, whether or not it is rational. People will feel richer.”

Most economists agree that boomers will drive declines in the labor force for years to come. The Bureau of Labor Statistics projects that the aggregate participation rate will be 62.5% in 2020, 1.8 percentage points below the level in 2010.

Ms. Dix, the retired insurance analyst, has used her increased free time to learn more about the stock market. Her favorite investment: a Vanguard Group Inc. health care fund.

“I'm loving the progress of that fund,” she said. “We're living longer, we're all getting sicker. Health care is a positive place to put your money.”

The Standard & Poor's 500 Health Care Index, including companies such as Johnson & Johnson and Pfizer Inc., soared 39% last year, beating the broader gauge. Health-care stocks are up more than 5% this year, exceeding the S&P; 500's advance.

Mr. Matus, the UBS economist, said trends in wealth and retirement aren't just coincidence.

“You've seen a drop in the participation rate for people over 55, and you look at it in the context of a rebound in wealth, and it all makes sense,” he said. “Do people really want to work past age 65 given the choice? Are that many people doing what they love? Let's put it this way: I've got an 8-year-old son, and he doesn't exactly say, 'When I grow up, I want to be an economist.'”

(Bloomberg News)

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