US Financial Question



  • OK, most of what is on here is political/military.  But there are some other great issues that are facing us in the US, including some critical financial issues.

    As most folks know, the US stock market has been on an upward run since the early 1980’s (excluding the hick-up of Black Monday and 9-11).  That upward spiral has been largely fueled by one thing:  401(k) contributions… people buying a set amount of stock, every month, no matter what the market does.  The result of 401(k)'s has been a continuous “buy” pressure on the market for decades that has forced prices higher.

    What most folks don;t realize is that the lion’s share of those continuous buy orders are funded by the 401(k) contributions of Baby Boomers.  There are a LOT more Boomers than there are Rabies and Gen X’ers.  Boomers also earn far more than their younger working counterparts (on average).

    Now, as the Boomers reach retirement (or shortly before retirement they can withdraw their 401(k) funds and put them into “secured” and “safe” holding accounts) that creates SELL pressure on the market.  And sell pressure drives prices DOWN, in short order.  As more and more Boomers hit retirement, that sell pressure increases, eventually ovwhelming the buy pressure of the younger Boomers and the Rabies and Gen X’ers.

    What you may not have realized is that you can withdraw from your 401(k) penalty free startign at age 59 1/2.  The Baby Boom ran from 1946 to 1964.  That means that the start of the Boomer 401(k) sell-off starts…
    It is already begun!

    And here is the kicker…  Why do you think GW Bush REALLY wanted to privatize a portion of Social Security contributions?  Was it for our benefit?  Nope!  It was to provide a cash infusion into the market to COUNTER the sell off of the boomer’s 401(k) sell-off!

    But alas, Social Insecurity Reform is dead.  And Wall Street will follow suit in short order.  I figure by 2011 we will be in the start of the longest bear market ever seen.  Dow 3,000 anyone?



  • Interesting,
    but i would not expect people to simply sell off their 401(k)s all at once.  The more likely thing is that people will simply stop collecting the interest, or sell these off slowly, no?  Now there would be less investment in the 401k’s obviously with the interest no longer going in there, but people would be still buying into them.



  • Actually, that is the kicker… they go from contributing to them, to withdrawing from them all in one swell foop upon reaching retirement age (or perhaps a bit earlier).

    Also, once the market begins to “slow” its growth, the withdrawl to “safer” investments like CD’s will become more widespread.

    It is a self-fullfilling prophecy that once the boomers start to withdraw their money, the market will soften, encouraging more boomers to withdraw their money…


  • Moderator

    Still it won’t happen.

    The stock market is it’s own breed.

    Baby Boomers have been contributing in 401K just as long as non-baby boomers.  And non-baby boomers will be contributing longer.  IE I’m only 29 and will have 35-40 yrs of contributing, same with the next gen and so on.

    The Baby boomers have only had what 20yrs???  Plus as you get older you gradually shift to “safer plays”.  Thoughout your 50s you should be shifting your more aggressive plays to safer bets.  It won’t be an all out cash out by every baby boomer from stocks.  It is very very very very unlikely that any baby boomer has 100% of their 401k in Stocks.  Esp as you near 60.  DIVERSIFY.  Again, I’m 29, so I can be more aggressive but I still only go about 60% aggressive, the rest is in much safer plays.

    Also the Stock Market is world wide, even if they sell off, the “regular traders” are going to sweep up the bargains as soon as they deem it’s fit.

    I mean for all we know their are going to be a billion Chinamen sweeping in to buy up US stocks in the next 10 years.  Which would easily offset the number of people that retire.

    Also Maybe the baby boomers were only diverting 2-4% to their 401K, whereas a younger single worker can afford 6-8%, whould would cover 2-3 people retiring.

    Then their is whether you get an employer match or not.



  • In Canada we have RRSP’s (registered retirement savings plans) which serve as tax-sheltered vehicals for people looking to invest money into mutual funds, stocks, mortgage funds etc.  When they retire, these convert into RRIF’s (registered retirement income fund).  People tend to withdraw only the money they need as they have to pay taxes on the money that they had earlier sheltered - which for smart people who don’t have a pension plan tends to just be the interest.  
    Note: as the income they draw from the RRIF tends to be much less than the income that they were making before retirement, then they are taxed significantly less.

    This is why i figured that people would only draw off the interest rather than withdraw the whole deal all at once.  Afterall - no one knows when they will die, and many people like to leave a legacy.


  • Moderator

    Yeah, that sounds similar to the 401K.  Although I’m not exactly sure about when you cash out here, but the likely hood of someones 401k being all Stock is extremely small.

    Here when you divert say 5% of your paycheck to a 401K, you buy into a mutual fund, or bond fund, money market, etc, which aren’t exactly like a stocks.  Which sounds like your RRSP

    So it isn’t like all of the retirees will be cashing out Microsoft Stock, or GM or whatever.

    I mean if you want you can just have your 401k go into a safe Money market account, in this case it would have no effect on the market.  theorectically you won’t earn as much over 10, 20, 30 yrs but you also won’t lose anything if the market tanks.  Which is why people split their 401ks between “risky plays” and “safer plays”.

    It more depends on your own personal risk factor.



  • Right.
    I tend to diversify quite a bit.  About 80% of my RRSP is in high-risk but potentially high-yield mutual funds.  Another 20% or so is in bond and mortgage-type funds.  I consider any money in money market funds to put one at risk for an opportunity cost at this point. 
    Also the term RRSP simply means that the fund is “registered” which means that this is money you do not pay tax on.  I believe that we may shelter up to 18% of our income this way.  At the same time, the amount of foreign content that we may purchase under these terms is limited.  This encourages people to save money, and invest in Canadian companies. 
    Anyway, if the 401k works the way that you suggest, then i agree that it is unlikely that one will see a massive sell-off of formally profitible funds.  I would imagine a shift to dividend-paying funds, but that simply means that certain companies will need to adapt if this is the case.  People will still want to make money (i.e. purchase stocks) and invest in American companies (i.e. purchase stocks) and i can’t imagine people simply selling off their entire portfolios for what?  To put in their mattress?  Even if they simply move the money from stocks/mutual funds into savings accounts, this is simply money that the banks will use to invest.



  • People will sell off their portfolios to do multiple things:  Buy government notes, savings accounts, fixed annuities.

    What I think you may be underestimating is the ripple effect from a significant, ongoing, and growing sell-off.  As more and more people sell of their portfolios (and all of those funds that all contain individual stocks), that creates downward pricing presure.  At first it will be slight, and will be coutnered by people buying bargains (as was mentioned).

    But if that price pressure is maintained by an increasing amount of sellign, eventually it will cause a slow-down in buying as well, as people begin to be concerned about a bubble bursting like we had with technology stocks on the NASDAQ (Remember when is was over 5000, and now is around 2000?).

    Investors are a jittery lot.  They look for trends, and they try to protect their own investments from losses.  When they see the increasing sell pressure, they will bail; just like they bailed from technology funds.

    Add in some other major “pucker factors” like GM being on the edge of bankruptcy, and Ford in dire straits…  Or the fact that the Pension Guarantee fund is in the red, and that does not consider any drain on it should GM file Chapter 11, or Delta Airlines; people will be being extra-cautious with their remaining retirement funds, and will run screaming at the first sign of a sustained dip in the market…



  • I’m actually more concerned about what will happen with regards to social security and medicare than I am about the stock market.  The stock market will take care of itself - it always has.  Even the crash of 1929 was eventually overcome (took 10-15 years but that shows the enormity of the 20’s bubble).  Black Monday, the dotcom bust, 9-11, etc. all demonstrate the market is quite robust.

    However, once the majority of baby boomers are retired, social security and medicare will require either the taxpayer or the beneficiary or both to give up a lot.  This isn’t going to be a fair deal for someone.  Its also going to hamstring the federal government with regards to budgetary matters.  Right now, the social security surplus is being spent as fast as it comes in (along with additional borrowing for yet more spending, which is the deficit).  When the time comes for the general budget to put back into social security, we won’t have much available money in the general budget for anything unless taxes are greatly increased.  :x



  • Thing is, and I’m not economist, it doesn’t seem to me like the private social security accounts really contribute enough capital into the market to reverse the losses from 401ks. I mean, we’re talking about single digit percentages coming out of the total money taxed by social security per person being put into this accounts. I could be wrong though.



  • It is just a matter of replacing the steady buying of 401(k)s with steady purchases of private SS funds.  Basically trying to counter the sell pressure of retiring boomers with the buy pressure of everyone else via both 401(k) AND SS.



  • Some companies have also been taken private, gone bankrupt, or merged.  This reduces stock supply.

    Banks, insurors, and college endowments will continue to invest in stocks.  In or out of the US would be the right question to ask.

    My current and prior co’s 401K plans all offered an international fund.

    I started allocating 60% of my paycheck contributions to it last year.


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