401(k) Flows: From Boomers To Millennials

The American economy seems to be moving in two different directions, doesn’t it? On the one hand, in industries like consumer technology and energy production, it continues to achieve ever more impressive levels of global success. But on the other hand, in sector after sector, it’s been ceding its “world’s largest market” status to China.

Not all of its bi-directional activity is global in nature, though; some is strictly domestic. Last week, for instance, the retirement investment industry was abuzz with the news that outflows from 401(k) retirement accounts are finally exceeding inflows on a continuing basis.

The reason? 401(k) accounts were first established to help the baby boom generation accumulate savings for retirement. And boomers, on schedule, are finally about to start retiring in large numbers.

That means that the American macro-economy is about to start experiencing a massive aggregate shift from “saving for the future” to “spending for today.” How will that affect our society?

Well, as money is withdrawn from well diversified stock and bond retirement funds, the financial markets might slump a bit. But as that money is spent by retirees and then circulated through the economy via the multiplier effect, the markets might then rebound.

Of course, if the expenditures are primarily focused on goods and services that are demanded by retirees, other sectors of the economy may weaken. But to the extent that those retirees are withdrawing retirement savings from international (i.e outside of the United States) stock and bond markets and then spending the proceeds close to home, the American economy may reap significant benefits.

Naturally, we must also consider the impact of other demographic groups on the American economy. Many retirement asset managers, for instance, are anticipating that the millennial generation will finally leverage the benefits of a strengthening job market by settling down, getting married, buying homes, and starting families. Such activities are usually accompanied by the establishment of retirement savings plans.

Furthermore, there is always a possibility that the federal government might finally get serious about immigration reform. The legalization of millions of undocumented millennials and Generation X’ers in the United States, perhaps accompanied by expanded visa programs for additional highly trained immigrants, might create a large new pool of retirement investors.

Which of these factors will prove to be most significant? Who knows? Clearly, we should be skeptical about any one who claims to be able to predict the future of the financial markets. Although it’s easy to understand why the emerging net outflow from 401(k) funds might serve as a depressive force on the investment markets, there are many other factors that might counteract its effect.

In fact, the only thing we know with absolute certainty is that the baby boom generation will inevitably continue to pass the economic baton to successor generations.  And the future of the American economy will increasingly depend on the talents, skills, and abilities of those future generations to navigate the challenges that confront them.