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How Will Generational Transfers Affect Market’s Future?

A poster over at Capitalstool.com posed some interesting questions on the nature of how generational demographic changes might affect the markets, which in turn got me to thinking about the aspects of these issues to which most investors probably give little thought. They involve a theme I have touched on recently, that is, how advances, or the lack thereof, in Alzheimers Disease treatment could have a very big impact on the future of our markets.

Here are the questions raised by Abby Justa Colon:

Doc, what are your thoughts on the huge transfer of assets from the WWII/Korea wars generation (actual savers) to the boomers and its effect on the markets?

I’ve often thought that if the markets were to pull back significantly that the first wave of retirement boomers may get nervous and bail creating a chain reaction. If enough get worried that they may never make their goal, they may settle for half their goal just to get out….kinda like a Nikkei 1990 style 20+ year sell off.

But then I talked to four people at work that took an early buy-out retirement package recently. Much to my surprise all had parents that had passed away in the last 5 years or so leaving them huge piles of stocks and real estate $$ that they had accumulated.

Kinda makes me wonder if the selling would be much more magnified…or….they wouldn’t sell at all knowing that they had such a large nest egg to fall back on.  

And my response:

Interesting questions. They are something I am facing on a personal level. The answer is, I guess it depends. How many of those baby boomers approaching retirement used the “equity” in their homes as an ATM, and are leveraged to the hilt? How many have paid off their homes? How many are now getting that big nest egg as their parents pass on, and how many are seeing those nest eggs disappear thanks to the ravages of Alzheimers DIsease. How many of them will be facing AD over the next 20 years?

The Alzheimers Association says that 42% of those 85 and over have the disease. My guess is that the vast majority of those people did not have long term care insurance. The more well-to-do may be easily able to afford the 45k to 75k per year it costs to care for an AD patient, but my hunch is that the vast majority will see their life savings wiped out over the course of the disease, and like so many in the end, the state will have to pick up the tab.

So I do think, that on balance, as the population ages, we could face long term liquidation pressure. The big question is whether some of the AD drugs now in the late testing stages are as good as reported. If they are, millions of Alzheimers victims will be able to live independently, at much lower cost, for much longer, perhaps indefinitely saving billions in assets for future generations.

If the drugs do not work as advertised, the costs to society are going to be staggering. I cannot imagine how they would be met without enormous financial dislocations. Perhaps they won’t be met. It’s a scary prospect.

I’m praying that the drugs work, even though they will surely be hideously expensive. I’d like to get the mother I knew back for the last years of her life and I’d like to be able to preserve her assets for the benefit of those whom she intended, not for the corporate executives and owners of ALFs and nursing homes.

For now, this little understood but hugely important transfer of wealth goes on.

Original posts at Capitalstool.com.

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