BRITAIN. Elderly Do No Have To Retire Gracefully

Your money The baby boomers are about to hit retirement and pretty soon this country will start to look like a giant geriatric ward. This dramatic impending increase in the grey-haired set is becoming a hot topic of debate amongst economists, market analysts and other investment experts who are keen to assess its impact on the financial markets.The British population has already aged significantly over the past 30 years. According to a recent report by The Office of National Statistics says the number of people aged 65 and over rose by 28 per cent between the years 1971 and 2003, while the number of those under 16 fell by 18 per cent. Similarly, In 1971, the median age was 34.1 years; while by 2003 it had risen to 38.4.But this trend has further to go. According to the Government Actuary’s Department, the proportion of the population over the age of 60 currently clocks in at 21.28 per cent – roughly in line with the average for the past 20 years. Ten years from now, the percentage of the population over the age of 60 will be 24.12 per cent, and by 2031, almost 30 per cent of the population will be over 60. One of the more persistent predictions as a result of these demographic changes is that a prolonged bear market will occur as the baby boomer generation retires and pulls its money out of the stock market. The theory, based mostly on the US experience, but often extrapolated to the UK and other major investment markets, goes that risk-averse retirees will move into safer havens – bonds and cash – and stock prices will then plummet. The link between demographics and savings is based on the life-cycle theory of investment. The young people borrow, the middle-aged save and the elderly run down their savings. So, the theory goes, as the baby boomers retire and cash in their savings, real share prices will should decline. But an empirical study published this past spring by James Poterba, an economics professor at the Massachusetts Institute of Technology, suggests that there will be no “asset market meltdown” and that the impact of the boomers on the stock market will not be at all severe. By weighing the returns of the market from the years 1926 to 2003 against the annual changes in several demographic indicators – including the share of the population who are retired (hese investors tend to be the biggest sellers of stocks), and the proportion of the population in the 40-to-64 age group (investors considered the biggest net buyers of stocks) – Poterba found that the market would s likely to come under only modest downward pressure. Over the next couple of decades, he says, the huge number of retirees may reduce the market’s annualised return by about one-half of 1 per cent. While this would have a negative effect on the stock market’s overall performance, the sky most certainly isn’t falling. Richard Skelt, head of multi-manager products for Fidelity Investments, says rising that the fact that average life expectancy has risen also is a factor. comes into play. ““Even after reaching the age of 65, most people still have a long life to live, so – especially with concerns about inflation eroding capital – retirement does not necessarily mean the end of people using the stock market as part of their savings strategy.” Skelt says that while older investors in western Europe, the US and Japan will ultimately gravitate in the direction of income-producing assets, rather than those that have the promise of capital growth, the shift will not be dramatic. The most likely scenario, he says, is that investors will work to “de-risk” their portfolios by making slow moves towards bonds and cash.” Suresh Sadasivan, manager of the Old Mutual Equity Income Fund, agrees, adding that even if the boomers withdraw from the stock market, the wealth being created in emerging China and India will have a far greater impact. Generally “You’d expect that with more sellers than buyers, prices will go down, but the world is a big place.” Indeed some fund managers argue that the massive growth in retirees could have a positive impact on certain industries and stock market sectors. Many have speculated that pharmaceutical companies will gain, for the simple reason that as people age, they will need to take more drugs. to keep them well. Others reason that life assurers will benefit by taking advantage of an increase in demand for savings products to keep them going in case they require fund needs for long-term care. (In the words of one of England’s foremost modern philosophers, “What a drag it is getting old.”) But A report issued by Citigroup Global Markets disagrees. enies refutes this. ese theories. The Authors, Edward Kerschner and Michael Geraghty, say that the boomer generation is represents a new breed of retirees and its their post-work ethos will be different. Its Their goals will be to remain healthy, wealthy and active, but there will be a “gap between [these] aspirations and reality”. Rather than exercise and a wholesome diet, boomers view pills, cosmetics, and plastic surgery as a path to health. In other words, looking good is more important than being good. “Many boomers [will] find themselves in the paradoxical situation of living an unhealthy lifestyle and taking a handful of drugs to remain active.” the authors write. Large Drug companies on the other hand, will face come be under pressure to hold down prices, which, combined with competition from generic drugs and imported medicines, could dampen profits growth, the report says. On the savings side, the report suggests posits that because boomers tend to be conservative investors,– they want good returns, but are worried about losing their capital – the companies most likely to benefit from their retirement will be those that have created “killer apps for the financial needs of today’s boomers”. Therefore, The asset managers, advisory-based brokers and insurance companies that have worked out new flexible types of annuities and financial products that allow investors to back a range of financial assets with some security will be the most likely group to gain. A third common prediction about the imminent boomer retirement concerns property. Many Experts havewarn that a housing bubble could burst as the newly retired population downsizes its property wants. and needs. Jim Ward, a director in the residential research department at Savills Private Finance, admits that the ageing population is an issue for the property market. “We have a rising retirement population with aspirations about how they want to live their lives, coinciding with a massive pensions crisis.” he says. Downsizing is likely to become a solution for many of these retirees, a trend that could have a material impact on the property market. But with growing numbers also expected to opt for equity release, the impact of this trend will be reduced. Jim Ward, says this prediction is “unduly simplistic”. “We have a rising demand for housing which should even things out,” he says. Ward also predicts that there will be an increase in housing specifically designed for the 55-and-older crowd. “There is a very clear need arising for housing with various forms of care attached – nursing homes or sheltered accommodation,” he says. “And there will be an increase of properties built to attract these older people.” By Rebecca Knight