Opinion: Sorry, baby boomers – rates haven’t (so far) been your friend

Overall, life for baby boomers has been good.

Those lucky enough to be born in the United States between 1946 and 1964 have experienced a growing economy and rising real estate and stock values, with their collective net worth reaching levels their parents probably never imagined. They have also benefited from some of the greatest advancements ever in science, technology and health, as well as music, entertainment and the arts.

Baby boomers were not bystanders when these changes happened, but active participants, making a significant contribution in every area to improving the quality of life for all. As their parents and grandparents fought the great wars and built the country’s infrastructure, providing baby boomers with a more peaceful world filled with enormous opportunities which they have fully embraced and helped move this country forward in amazing ways. and impressive.

However, at least one thing that hasn’t worked in their favor is interest rates. On this measure, baby boomers have been in the wrong place in life at the wrong time, in part because of their own influence on growth and inflation. When they entered the workforce, got married, and raised a family, borrowing costs were high. The rapid expansion of the workforce and rising consumption have boosted economic growth, but also boosted demand for credit.

Before they could accumulate assets, they were net debtors. Many have borrowed to buy cars and houses, to educate their children, and to start businesses, all at the highest interest rates this country has ever seen. Ask almost every baby boomer what their highest mortgage rate was, and they’ll most likely say it was in the double digits.

In fact, high loan rates were the norm for most of their professional careers. The oldest baby boomers were 21 in 1967 and, assuming they stayed in the workforce until age 65, began to retire in 2011. During this period, the average return 10-year Treasury yield was 6.14%, and the rates they paid on loans exceeded Treasury yields then in effect. Moreover, the average Treasury rate during this period was almost 200 basis points higher than the 21 years before 1967 (4.28%) and almost 400 basis points higher in the last 10 years since baby boomers began to retire (2.16%).

Baby boomers were also the first demographic to fully embrace credit cards and the higher interest rates associated with them. The first credit card came out in 1950, but its widespread adoption was relatively slow. In 1970, only 16% of families had a credit card, according to Federal Reserve surveys of consumer finances. But in 1998, two-thirds of families owned at least one credit card, and many had unhealthy month-to-month balances, paying forfeiture rates as they did.

Nonetheless, baby boomers have thrived during their professional careers. U.S. GDP grew at an average annual rate of 2.9% from 1967 to 2011, and household net worth grew at an average annual rate of 5%. For those who are able and willing to invest a portion of their retirement savings in stocks, the Dow Jones Industrial Average DJIA,
+ 0.44%
increased to an average annual clip of 10% if dividends were reinvested.

But the baby boomers need that nest egg now. Interest rates have not been their retirement friend so far. If you consider short-term rates, such as the yield on 3-month treasury bills which serves as a fair proxy for the rates earned on savings and money market deposits, they have only been on average only 0.58% since the baby boomers first retirement date in January 2011 – and that includes short-term rates peaking at 2.50% at the end of 2018, during the last phase of Federal Reserve tightening . The story has been the same for long-term yields with, as mentioned above, 10-year Treasury yields averaging just 2.16% since 2011.

This has a huge impact on what baby boomers can earn in retirement from their basic fixed income assets. It takes a lot more income-producing assets today than it took at any point in their working years to produce even a modest level of retirement income. The table below is illustrative:

At the net debtor stage of the baby boomers’ financial lifecycle, interest rates were at all-time highs. The 10-year Treasury yield peaked in September 1981 at 15.8%. While their parents enjoyed the opportunity to earn record rates on their investments in cash and long-term bonds – in fact, able to earn $ 10,000 in extra retirement income with less than $ 80,000 invested – the baby- boomers were primarily paying these rates rather than earning. Obviously, inflation rates were also high during the period, so baby boomers profited from paying off debt with dollars discounted for inflation, but it took significant cash flow. to service this debt.

For the first baby boomers who retired on January 1, 2011, at age 65, the value of retirement assets needed to produce the same inflation-adjusted income of $ 10,000 (now 22 $ 898 in 2021 dollars) had risen to $ 679,459. Not only did the inflation-adjusted dollar annual income requirement increase, but 10-year Treasury rates also fell to 3.37%. Fast forward 10 years to January 1, 2021, when the baby boomer age range was 57 to 75, and the midpoint is 66, and it took $ 2,820,595 to produce the same $ 10,000 in equivalent income.

Of the more than 70 million baby boomers in the United States today – who are now the second largest demographic cohort behind millennials (born between 1982 and 2000) – 60% are still working, according to data from Pew Research.

So, while the pace of baby boomer retirements has skyrocketed in 2020, as the COVID-19 pandemic has caused (or forced) many to adjust their plans, most of this demographic don’t. has not yet retired. According to Jo Ann Jenkins, Executive Director of AARP, “Over the next two decades, the number of people aged 65 and over will almost double to over 72 million, or 1 in 5 Americans. people 65 today will live to be 90 years old. “

This strong demographic trend and the amount of invested assets needed to produce even a modest level of supplementary retirement income largely explain the seemingly insatiable demand for bonds since the global financial crisis of 2008. This experience, during which Collapsed house prices and stock values ​​had a long-term impact on baby boomer psychology regarding risk. The volatility and uncertainty associated with the pandemic likely reinforced this cautious outlook for many.

The graph below illustrates the spectacular and largely sustained flows to bond funds since 2008. According to the Investment Company Institute and Strategas, net flows of US bond funds totaled nearly $ 3.2 trillion compared to 2008, eclipsing the $ 176 billion in equity fund flows (data through April 2021 and March 2021, respectively).

While short-term rate movements, one way or the other, often attract a lot of investor attention, the rate movement seems to have had little influence on flows over this period. It was not until 2013, during the Fed-induced “taper tantrum”, when 10-year yields rose 127bp during the year, that fund flows turned negative as the interest rates were rising. Even then, the outputs were relatively modest. It should also be noted that bond fund flows have been positive since the start of 2021 despite the sharp rise in rates at the start of the year.

Perhaps we are at an inflection point in interest rates, as some suspect. We clearly know the fastest pace of U.S. economic growth since the 1980s, as the economy reopens and pandemic stimulus packages have left many consumers with money to spend.

Inflation is also rising due to both base effects and supply chain disruptions, and some fear inflation may be more rigid this time around, rather than transient as the Fed expects.

If this is true, and growth and inflation concerns continue to push rates higher over the next few quarters / years, it will be an unusual and perhaps long overdue rate giveaway to the baby generation. -boom. Every basis point that increases returns helps them transition from collecting a paycheck to the life of their invested assets.

Duane McAllister, CFA, is a senior portfolio manager at Baird Advisors, a fixed income manager with more than $ 120 billion in assets under management.


Past performance is no guarantee of future results.

Investors should carefully consider investment objectives, risks, fees and expenses. This and other important information is contained in fund prospectuses and simplified prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

In a rising interest rate environment, the value of fixed income securities generally decreases and conversely, in a falling interest rate environment, the value of fixed income securities generally increases. High yield securities may be subject to increased market, interest rate or credit risk and should not be purchased solely on the basis of stated performance. Ratings are measured on a scale from AAA or Aaa (highest) to D or C (lowest). Quality investments are those rated highest to BBB- or Baa3.

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