I am asked from time to time about what impact the Trump presidency will have on the markets and my response is, “It all depends.” It all depends on what Congress will go along with and what geopolitical events occur around the world.
He was elected based on some of his economic ideas for lowering taxes for corporations, fixing health care and overhauling the tax system. All of these can have an impact on the markets in the short term, but none of them – as of the writing of this post – have been accomplished.
But there is so much more at play here. There is a much bigger picture than President Trump that has to be understood.
What has a much more far-reaching impact on the markets than President Trump and what will likely have a much more significant effect on your retirement account has nothing to do with this presidency? The focus needs to be on the fact that Baby Boomers are aging and using their money.
Shocked? You shouldn’t be. Consider the perspective of the Baby Boomers, and you will begin to see the impact it has on markets and your retirement.
For people who have been working in this country anywhere from the 1970s until today, they have seen a complete change in retirement.
It started with the ERISA Act of 1974 when personal retirement accounts became available to everybody in America for the first time. Now there have been a number of things that have changed in the internal revenue code since then.
In 1978, section 401(k) was added to the Internal Revenue Code, and that’s the first time that a lot of companies started offering a retirement plan for employees to participate in.
This is significant because, by 1980, you saw really big companies start coming out with their first retirement plans. And when we look at what’s happened from then until today, pensions have almost entirely gone the way of the dinosaur. They almost don’t exist; very rarely do I see them anymore unless you work for the government.
Now during the same time period, the Baby Boomer generation started putting money into retirement plans for the first time.
When you review the history of the stock market, there’s one part of history that really stands out, and it’s the period from 1980 to 1999.
From 1980 to 1999, one of the things that happened was this huge amount of people having access to retirement plans and on top of that, they hit their sort of prime earning years right around 1990 until 2000. There’s no mystery why the stock market was up.
The stock market is really as simple as supply and demand. If there are more people buying, prices go up, and if there are more people selling, prices go down. This is how complicated the stock market really is.
If you have this huge group of people for the first time putting money automatically into these 401(k)s or other types of retirement plans, you’re going to get this huge run-up in the market because there are a lot more buyers.
Now, why is this important? 2016 is the first year those Baby Boomers are turning 70½ and if you know what 70½ means, it means that you have required minimum distributions.
Required minimum distributions, whether you’re taking them already or not, means that for the first time the same people who put all this money into these retirement plans are going to begin taking that money out.
So, what’s going to happen? Well, you’re going to have all these people who are selling. They used to be buyers for years, and now they are retired or are retiring and are ultimately going to be forced to sell out of those retirement plans.
You’re going to see things that we’ve never had to deal with in this country before now. All of these people that contributed to this huge run-up in the market are now going to be contributing factors to selling pressure on the market.
Now the offset that would be if the younger generation – the new workers – save as much as what is being forced out of retirement plans. Then it’s a non-issue.
The problem is that much of the proceeding generations are barely saving for retirement or they’re so saddled with debt that they have no ability to save even if they wanted to.
Take a look at the Millennials entering the workforce; they have significant student debt. Their biggest priority is paying their debt off before they can think about saving.
You’ve got a number of things that are really different today compared to 30 or 40 years ago. This is an entirely different retirement.
All the things that maybe worked for people in the ‘80s and ‘90s don’t work anymore because the dynamics completely changed. The landscape as we know it is different.
So, maybe now you can see why following the old rules of investing and planning for retirement are not likely going to work. You have to look at retirement differently, and you have to think differently about your money.
Brian
