Rich Dad's Prophecy? Discuss

[frugaladventurer]

Was in a used bookstore the other day and picked up an old (2002) book by the Rich Dad/Poor Dad guy called Prophecy. Now, I read his original book a long time ago, and frankly, while he had some interesting things to say on some things, I wasn't impressed overall. And frankly, I'm always suspicious of people who make their money telling other people how to invest in real estate (couldn't they make more money in their real estate investments?).
But, I thought I'd read this book out of curiosity, to see what he was warning about in 2002 and if it had come true.
Now, the main point of the book is one I've heard voiced elsewhere - large numbers of baby boomers (who have become reluctant amateur investors by virtue of having IRAs and 401ks instead of the defined benefit pensions of their father's generation) will soon start hitting the age of mandatory withdrawals from their retirement accounts, and will start selling their stocks and be a drag on the stock market.
As a member of the baby boom generation myself, I've definitely seen the effect this big demographic wave has had as we've moved through various stages, such as the big run up in real estate prices when we all bought homes. And I do see that boomers will definitely be withdrawing money from the stock market. The question I have is, how big an effect will it be? And how will it affect my personal retirement plans?
As for the size of the effect - large numbers of boomers will be retiring, yes. I'm not sure how big a percentage of the stock market is tied up in their retirement assets (as opposed to, stocks owned by the 1%). One of the author's arguments was that these unsophisticated investors, will be more likely to panic and convert their money into cash holdings.
On the one hand, he's right - unsophisticated investors, facing retirement, ARE more likely to panic in a downturn and sell their stock in hopes of preserving at least some money. These are the people whose pockets got picked in the last downturn.
Then, there's also the effect of mandatory withdrawals - after age 70, you have to take out a certain amount per year so the tax man can get at it. Of course, you could take out the money, then invest it back into stocks outside of your 401k or IRA - but no one does. My mom is an example of that. So, the typical mutual-fund-holding baby boomer retiree will be selling stocks every year whether they need to or not.
Of course, there's also the problem that boomers haven't saved nearly enough to retire on. So, as they retire at 65 or 66, they're likely to pull even more money out than they should, and spend it (my mother's best friend, a woman who never COULD budget, has spent her retirement funds frivolously and is almost out of money).
So - the question is - will this effect be large enough to pull the stock market down into another, bigger crash as he predicts in his book? And if so, what are the alternatives for those of us with money in the stock market?
YMOYL was written many years ago, when interest rates on bonds were 10% - at that time, that book advised staying out of the stock market, and keeping enough money in bonds that you could just live off the interest. Not bad advice for the time, maybe, but not tenable in today's bond fund bubble.
The Rich Dad guy's advice - invest in real estate, get rich so you can invest in hedge funds, start a network marketing business (read MLM - read pyramid scheme) -seems pretty lame and unsound, with the possible exception of investing in real estate right now, which is probably ok.
So the question I put out there is - do you think the baby boomer draw-down will deflate the stock market, and how do you intend to prepare for that eventuality?

[Christopherjart]

I personally doubt it will be any worse than any other downturn. It isn't as if all the boomers will retire the same year (nor do I imagine that they will all sell all their stocks at once) and since quite a few have little to no savings it isn't as if they have that much to sell after all.

[jacob]

http://earlyretirementextreme.com/the-m ... sting.html
How I prepare? Value and dividends, not total return.

[Dragline]

It's just one variable in a sea of them -- and its not like they are all going to retire at once. Heck, most of the boomers never saved enough and will probably just keep working until they drop.
And I think Kiyosaki stole this idea from Harry Dent, who has been predicting a boomer retirement stock market crash just about every year for years. Here's this year's model: http://www.businessinsider.com/harry-de ... -q3-2013-1
Sooner or later he'll be right and will assume a mantle of brilliance. In the meantime, these sorts of things are very good for book sales.

[jacob]

I was trying to find that Harry Dent book. I got the first name right, but not the last. I'm not revealing what embarrassing last names I though it was ;-P
Overall, this idea of handing over your savings to the secondary equity market is ... well ... good for IPOs since they get a place to unload their ... uhm ... projects that are not great enough to keep private. Hopefully this will grow the economy better, but in an alternative universe the money could equally have been parked in banks for them to lend out. My guess is that in the proverbial long run, the effect will have a demographic effect. Also that stock returns are artificially high because stocks used to have much less of a populist dimension than they do now. Stock ownership used to be rare before the 1950s.

[George the original one]

I'm barely a boomer. Barely. In 20 years I'll have to take IRA required minimum distributions. In 20 years, coincidentally, Social Security will begin running a deficit (unless positive changes defer that date).
If the boomers spend their money, do you not think it will stimulate the economy? And if the economy is stimulated, will that not drive stock prices upward as the wealth is redistributed?
The smart money, the surplus money, will be sheltered. The smart money will go into Roth IRAs, where there is no RMD and then that money will be passed onto heirs indefinitely. The smart money will also go into trusts, where it will not be withdrawn until the heirs are forced to disolve the trusts.

[George the original one]

Hmm, I could also see a future where smart boomers who are comfortable, but not wealthy, take part time jobs during retirement so that they can shift money into Roth IRAs so they can have more control of their money and avoid RMDs.

[frugaladventurer]

Yes, the only good thing about the year my alimony runs out, is it will drop my income into the bracket where I can start funding a ROTH IRA lol.

[secretwealth]

I have a hard time imagining a lot of people will take part-time jobs just to postpone getting cash from an account.
I can easily imagine boomers spending money more aggressively in retirement as George suggests, and this causing a stimulative effect on the economy. On top of that, I could easily see boomers getting out of well-paying mid-upper management jobs that would go to X/Yers, causing them to spend more, and freeing up some lower work for younger people.

[frugaladventurer]

Boomers won't be spending MORE money in retirement - they'll be spending less than they did during their working years, because they will have less money to spend. Often MUCH less, since they did not save sufficient funds for retirement.
The initial wave of retirees may not have a disastrous effect - after all, for every 70 year old first-wave boomer retiree who starts automatic withdrawals, there's two like me in their fifties, saving extra-hard to prepare for retirement. But a few years in, the effect is bound to be amplified. And panics on dips in the stock market will become worse.
I agree that investments in things boomers will be spending money on - pharmaceuticals, nursing homes, etc. - may be sound. Especially if you are investing for dividends and not expecting to sell those shares for a long long time.
But investing for stock share price appreciation may be a very dicey proposition if baby boomer stock sales are a significant factor in the market.

[frugaladventurer]

Historical price - to- earnings data for the S and P 500:
http://www.multpl.com/

[Seneca]

"Descriptive statistics. There was at least one retirement account in 57 percent of the households. The average or mean amount in the retirement accounts was $49,944, but the standard deviation was $174,193, suggesting that the dollar amount held in retirement accounts varies widely by individual households. The median amount held in retirement accounts--$2,000--provides another indication of the wide variation in the amounts held by households."
http://www.bls.gov/opub/cwc/cm20050114ar01p1.htm
The Boomers just haven't saved much money. Half have saved less than $2000! (as of 2005) Most of the stocks owned by Boomers are highly concentrated in a small minority and likely to have a slow drawdown.
I'm much more worried about what they will do with their voting block and the government than I am what their withdrawls from the market. Also, as the son of non-saving Boomers, I'm most worried about what support I will need/feel compelled to provide them.
Another argument I have read, and liked, was that even if there are lots of assets that hit the market, plenty of savers in the world are happy to buy US assets.

[GandK]

@Seneca:
"I'm much more worried about what they will do with their voting block and the government than I am what their withdrawls from the market."
ME TOO. AARP scares the crap out of me. I was heartened by the recent HuffPo column in which Ron Sider quit the AARP citing "intergenerational injustice" (http://www.huffingtonpost.com/ronald-j- ... 71577.html) but I doubt this will be the stance taken by most.

[secretwealth]

That's the basis of Albert Brooks's recent novel: http://www.nytimes.com/2011/05/02/books ... .html?_r=0
The idea does scare the crap out of me too, especially since the Boomers have a horrible track record of selfishness.

[jennypenny]

Haven't the Boomers already started raiding their retirement accounts because of the Great Recession?
I've never seen any statistics that show how much money Boomers have in the stock market (not per person, but an overall percentage of market share). I wonder how much is really owned by Boomers in tax-deffered accounts that will be subject to RMD. Maybe it's not that much anymore?
Once AARP came out in favor of Obamacare they angered a lot of people on the right. I get email all of the time urging me not to join AARP, so I think their influence will lesson over time.

[Dragline]

I would imagine that a lot of the boomers who at least tried to save something are in this guy's shoes (he's a late Silent Gen, but still working at 73):
http://live.wsj.com/video/almost-a-mill ... 1F77DCCA29
A cautionary tale to say the least -- kind of goes with that thread about high-risk investments.

[secretwealth]

Well, trading volumes are way, way down and keep going down (the New York Times recently reported that retail investors are coming back to the market, but I haven't seen any numbers to back that up, and trading volumes for the Dow Jones Index are down on a year over year basis). I guess a lot of that could be account raiding for retirement--but funnily enough it hasn't caused much of an impact on prices although it's hit volumes. I don't know how sustainable that is.
On Obamacare: Younger people by and large support it and I imagine, as it lowers healthcare costs, a lot on the right will embrace it. How many far-right Republican retirees love Social Security and Medicare--two ideas that are radical left-wing and quasi-socialist according to their ideology?

[A Life of FI]

While it may be true that if the baby boomer's do sell out of the market in mass, because they need the money to spend, stock prices will be reduced (less demand for stock/more supply). The counter effect of this will be increased sales / profits / dividends - as the boomers will be buying services / goods with the money they received from their stock sales.
While this may not be good for any one looking to cash out of the stock market when / if this happens those staying in will benefit from higher profits / dividends.
I think the bigger demographic problem that could occur with stocks is if the world population decreased (assuming you invest internationally / in multinational companies). I haven't seen anything to indicate the world population is going to decrease but if it did then there would be less consumers and companies would sell less and meaning lower profits/dividends. This would be the real problem for stockholders.
A group of stock holders (the baby boomers) looking to trade their ownership rights for higher consumption of goods and services and a growing world population (much of which don't own any stock) further increasing demand for goods and services seems to be a very good situation for those people continuing to own stock.

[A Life of FI]

While it may be true that if the baby boomer's do sell out of the market in mass, because they need the money to spend, stock prices will be reduced (less demand for stock/more supply). The counter effect of this will be increased sales/profits/dividends - as the boomers will be buying services/goods with the money they received from their stock sales.
While this may not be good for any one highly leveraged or looking to cash out of the stock market when/if this happens those staying in will benefit from higher profits/dividends.
I think the bigger demographic problem that could occur with stocks is if the world population decreased (assuming you invest internationally/in multinational companies). I haven't seen anything to indicate the world population is going to decrease but if it did then there would be less consumers and companies would sell less and meaning lower profits/dividends. This would be the real problem for stockholders.
A group of stock holders (the baby boomers) looking to trade their ownership rights for higher consumption of goods and services and a growing world population (much of which don't own any stock) further increasing demand for goods and services seems to be a very good situation for those people continuing to own stock.

[RealPerson]

I am not sure about boomers actual numbers. Anecdotally, I know many of my older colleagues have delayed retirement due to the economic situation. The predicted shortage in my field has become more of a surplus as a result. Maybe these people delaying retirement are actually adding money to the market instead of withdrawing. I would love to see some of the actual numbers. Does anyone know where to get these?