About five years ago, pundits and consultants began heralding the looming retirement of baby boomers (BusinessWeek, 5/15/08)—some 78 million strong—as an enormous opportunity for the financial-services industry. The Social Security Administration went so far as to dub the expected phenomenon a "silver tsunami."
Judging by the combined spending associated with advertising campaigns as well as new product development, IT investments, and various strategic acquisitions, financial institutions jumped on the bandwagon. You've seen their ads: Fidelity National Financial (FNF), Bank of America (BAC), Charles Schwab (SCHW), Principal Financial Group (PFG), Prudential Financial (PRU), Wachovia (WB), ING, Ameriprise Financial (AMP), Hartford Financial Services Group (HIG) (which recently made three large acquisitions in just three months), and so on.
Other industries have jumped aboard, too. There are target-date mutual funds, investment funds that buy up retirement businesses, and expanded offerings from a variety of leisure industries, all counting on legions of retirees to fuel their growth.
There's just one problem: The pundits are wrong. Through at least the next 25 years (i.e., past the time the last baby boomer turns 65), the retirement market will be far smaller than the oft-cited 78 million—regardless of whether one is referring to the number of people retiring or the number of living retirees. In fact, compared with today, the growth rate of either of those two measures will be less than 4% annually for the next 25 years—and could very well be zero.
More Ebb Than Flow
Oddly, given what's at stake, it appears that very few companies actually crunched the numbers to see exactly when this tsunami would hit the shore, and exactly how large it would be. In fact, there has been no published report that we at the Coyne Partnership or our clients could find detailing the estimated number of workers vs. retirees on a year-by-year basis over the next 25 years.
This would all be fine if the arithmetic confirmed that there will be 78 million boomers joining the retirement party in a short period. But when you actually run the numbers—which the Coyne Partnership did, by painstakingly obtaining, reconciling, and analyzing data from four different government sources—a vastly different picture emerges.
Far from 78 million, the actual number of "true retirees," which excludes those who never worked in the first place, will reach only 46 million in 2017 (10 years out from our base year of 2007)—and that's if the trend to work longer stops today. Given that the trend among persons over age 50 to work longer has actually been going on since before 1994, that isn't likely. In fact, a more probable scenario, in which more older Americans choose to work beyond age 65, produces less than 36 million retirees in 2017. If that still sounds like a lot of retirees, consider this: There are already 35 million "true retirees" today. That's right, there would be essentially no growth at all in the number of retirees.
Calculating the Tides
More generously, if you expand your definition to include those older Americans who never worked (14 million today vs. 17 million in 2017), you can avoid an actual drop in one particular definition of "retirees"—but just barely. So the highest growth assumption is less than 3%, and the more likely growth rate is under 1%.
Or consider the number of new retirees each year. After all, many retirement products and services (such as those rollover IRAs being advertised so heavily, or new retirement homes for those migrating to the Sun Belt) are sold on a one-time basis—at the onset of an individual's or couple's retirement. If those 78 million baby boomers were born over a period of 18 years (from 1946 to 1964), you might expect about 4 million a year for the next couple of decades, right?
Not so. The number is actually about 1.8 million this year, and will stay under 2.6 million per year for the next 25 years. Why? First, you have to subtract about 15% for people who did not participate in the workforce. There are also more people than you might think who had only part-time careers—about 18%. Add in that many people today work well past age 65, and these factors dramatically reduce the number of people retiring in any one year.
How to Ride the Wave
So who wins and who loses, given this wholly different view of the future? Apart from the gurus who make their living giving speeches about the impending retirement "tsunami," the biggest losers will likely be the financial institutions. Banks, brokerage firms, and insurance companies have already invested heavily in the retirement financial-services market, predicated on its supposed growth rate. Many of the largest institutions in the country were counting on this market to be their largest source of profit growth for the next decade or more.
Now they face an overcrowded marketplace and probable price declines for their services—not what they needed on the heels of the subprime mortgage catastrophe. Others industries will lose, too, but less so if they have not already begun spending in advance of the presumed growth.
If your product or service depends heavily on the act of retiring or on the activities of retirees, it's time to rethink your strategies. If your company makes golf clubs, hobby equipment, gardening supplies, boats, or any other products that help fill the leisure hours of seniors, it's time to rethink. Perhaps you need to ensure your products can appeal to those with less time on their hands or to other demographic groups. Or perhaps you simply need to plan for slower expansion—and certainly build less capacity before demand materializes.
You're in the same predicament if your company provides leisure services—including all forms of recreational travel, gambling, or retiree-oriented adult education (e.g., cooking or dancing classes)—or if you run a restaurant chain frequented by seniors, for example (since working seniors eat out less often than retirees of the same age). And if you run a real estate company that develops retirement communities, it's time to reconsider whether you want to commit to megaprojects with long lead times or simply build to accommodate proven medium-term demand.
On the flip side, the big winners from the smaller-than-anticipated retiree population may well be … all the rest of us. Demographers had been forecasting serious labor shortages in the economy as the baby boomers left the workforce. Presumably, those will turn out to be less severe than previously thought. And of course, our economy as a whole will be more efficient. Remember, economists like to measure the retiree-to-worker ratio, which serves as a proxy for how much burden the economy places on a single worker. Our analysis suggests there will be fewer retirees and more workers, and therefore less economic burden than previously thought.