Will boomers cash in?

Actually, boomers may be working until age 71 or 72 whether they like it or not, add economists Anne Casscells and Robert Arnott. That's what they say is needed to maintain today's "dependency ratio" - the number of nonworking people, including retirees and children, per working person.

With little change in the retirement age, that ratio is expected to move up quickly and dramatically for three decades starting in 2010, with a massive influx of nonworkers. These nonworkers would be sellers, not buyers, of stocks, driving prices down.

"Our guess is that getting poor investment returns [in the future] is fairly likely, and it would be part of this process of people working longer," says Ms. Casscells, a managing director of Aetos Capital in Menlo Park, Calif. As retired boomers sell assets to buy goods and services (such as $1 trillion or more per year in healthcare services), demand pushes up prices and wages for the relatively smaller workforce, creating inflation. Because boomers' savings now can't buy as many goods and services, they will hesitate to retire as early or go back to work.

If boomer savings are smaller because of poor investment performance, as some forecast, that also would delay retirement. In this scenario, "When you're 64, and you take your 401(k) [retirement savings plan] to your financial planner," Casscells says, "your financial planner says, 'This isn't going to cut it.' " So it's back to work.

Those born between 1910 and 1940 may turn out to be the "golden generation" of retirees, enjoying an average of 16 to 18 years of retirement if they made it to 65, funded by a huge cohort of baby-boomer workers, say Casscells and Mr. Arnott, chairman of Research Affiliates in Pasadena, Calif. Boomers should expect about 12 years of retirement, based on retiring at age 72, they say.

Though some people will stay invested in stocks throughout their lives, poor market performance could become a vicious cycle for boomers. If they have had a poor experience with the stock market during the years they are contemplating retirement, Casscells says, "they're likely to say, 'Forget about this. Just give me something safe' " with a fixed return - causing yet more selling.

In theory, since these demographic changes have been known for years, markets should have already taken them into account. But research published last year by Stefano DellaVigna at the University of California at Berkeley and Joshua Pollet at the University of Illinois suggests that both institutions and individual investors are shortsighted, looking only about five years ahead in assessing stock values. That window is about to include the first wave of boomer retirements, which investors now may begin to weigh when making investing decisions.

Others add that the cash-in crisis fails to take into account immigration of new workers into the United States, which will help keep the dependency ratio manageable. But Casscells points out that immigration rates would have to quadruple during the next 25 years to keep the current worker/nonworker ratio in balance.

Another mitigating factor: Empirical data suggest that financial assets "decline only gradually during retirement," says James Poterba, an economist at the Massachusetts Institute of Technology, in a 2004 paper. "The evidence suggests only modest effects, if any, of a changing demographic mix."

And since boomers were born over an 18-year span (1946 to 1964), that will spread the effects of their retirement even further, Mr. Gist says. The peak birth years didn't arrive until the mid-1950s, meaning the biggest part of the boom won't turn 65 until 2020 or so, still 15 years away. At this point, he says, "it's a tricky thing to make any predictions about."

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