Big Spenders

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Over the next 10 years, medical, personal and household services firms may benefit greatly from aging Baby Boomers.

Will history be repeated? Over the past 10 years, we have witnessed a wealth-producing coincidence: the fastest growing age group — leading edge Baby Boomers, ages 45 to 54 — also had the highest household income and spent more on consumer goods than any other age cohort. Savvy investors and business planners reaped billions in asset appreciation by realizing that the 1990s were going to be a boom decade for the goods and services those Boomers wanted.

Is the spending spree over? Based on the behavior of pre-Boomers, one would expect that throughout this decade, as leading edge Boomers enter the 55 to 64 age range, they will earn less and spend less. Surveys conducted during the 1990s by both the Census Bureau and the Bureau of Labor Statistics reported declines in household income and spending between the 45 to 54 age group and those 55 to 64. This history suggests that the big spenders are on the wane.

However, Baby Boomers have repeatedly shown a tendency to break with the behavior of the generation that preceded them. If they do it again, we are about to see an important shift in the historical age/income pattern: Boomers will delay their exit from the labor force — and forestall any decline in household income — in the same way they delayed marriage and having children. As a result, Boomers may enter their mid-50s and 60s with their household income undiminished — a change in a demographic pattern that would create huge investment and business opportunities, especially for service firms.

In fact, the number of big earning, high spending Boomer households is continuing to increase, even if the pace is slowing down. During the past decade, more than 12 million consumers were added to the 45- to 54-year-old cohort. This decade, another 6 million to 7 million will be added. But by 2010, the number of people in their peak earning years is expected to crest — until Generation Y comes of age. Thus, between now and 2010, the highest population and household growth will shift to an age group — 55 to 64 — that has historically worked less than those ages 45 to 54, earned about one-fifth less than those 45 to 54 and reduced their spending as well.

The reasons Boomers are likely to break with patterns set by their predecessors stem from core differences between the two groups. For the most part, the 24 million people who are now 55 to 64 have very different attitudes and attributes than the 37 million older segment of the Baby Boomer population who will follow them. Therefore, the past income and spending trends we have observed among 55- to 64-year-olds will likely be of little help in predicting what Boomers will do when they move into that age category.

Several striking differences exist between Baby Boomers and the pre-Boomers. For instance, more Boomer households have two incomes. Since most Boomer families had their children later in life, most have to keep working to pay for their children's college education. Also, on average, Baby Boomer households have saved less and have taken on more debt. Therefore, the vast majority must keep their earnings up if they plan to retire someday.

Boomers are also better educated than the elder group. For example, 28 percent of women ages 45 to 54 are college graduates versus only 19 percent of women 55 to 64. And nearly two-thirds of those college grads, ages 45 to 54, work full-time (and earn an average of about $50,000 a year) versus less than half of similarly educated women who are 55- to 64-years-old.

To revert to the employment profile of pre-Boomers, nearly 4 million fully employed women at the leading edge of the Baby Boom would have to give up that earning power just when they need it the most. That's not likely to happen, and their male counterparts are not about to give up their jobs either.

As a result of older Boomers delaying their exit from the labor force, this decade will likely include not only the largest ever age cohort in their peak earning years of 45 to 54, but also the most rapidly growing group of 55- to 64-year-olds with their household income undiminished.

One potential beneficiary will be the stock market. Suppose, for example, that when Boomers reach their late 50s and early 60s, they decide it's finally time to start saving. One percent of the 1999 aggregate income of 45- to 54-year-olds Boomers is about $15 billion. In a year or two, that will probably be in excess of $20 billion. Suppose further that over the next decade, to make up for a lifetime of not saving, Boomers just match the savings rate of today's 55- to 64-year-olds. That would mean investing an average of another 5 percent of their aggregate income or $100 billion a year. With the promised tax cuts and rising incomes, new investments in the stock market over the next nine years just from future 55- to 64-year-olds could easily exceed $1 trillion.

The bottom line is that with retirement looming and bigger tax breaks on the horizon, a lot more cash will flow from older Baby Boomers into stocks or mutual funds, keeping the market indexes generally rising. No other place than the equities market holds the promise of building an adequate retirement account in such a short time frame.

In addition to the market, where else will Boomers put their money? Over the next 10 years, three types of service firms may benefit greatly from this anticipated demographic change: medical, personal and household services. As Baby Boomers approach age 60, the number of people who have chronic conditions like high blood pressure or arthritis will increase, along with the number of folks wanting cosmetic surgery. Almost any walk-in neighborhood medical clinic should see its business growing over the next decade.

The businesses of providing personal and household services will grow for the simple reason that as people age, they want more tasks done by someone else that they previously might have done themselves, like mowing the lawn or cleaning the house. And they also want more personal services, like facials or massages, that make them feel better.

Providing consumer products for aging Boomers is going to be a marketing challenge. By the time most people reach age 60, they have already bought most of the personal or household goods they need. As this is a replacement market, encouraging them to toss out or trade in a perfectly functioning appliance or other consumer product will mean creating pure desire, because there is no need. It means playing Boomer psychographics like a violin.

Successfully marketing consumer goods to this group will require more than a big advertising budget. It will require a deeper understanding of the inner need of this generation for something that they think is created only for them. So the antiques (or clever reproductions thereof) business, firms that make customized cars or anything with a “one-of-a-kind� appearance, as well as architectural or other design firms should have no trouble finding work. Makers of generic or low quality, mass-produced goods may be in for a tough decade.

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