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How Baby Boomers Will Change the Economy

Tom Sightings

In the year 2000, approximately 2.5 million Americans turned 65. This year, more than 3.5 million Americans will pass that milestone. And the number of people joining the ranks of the elderly will keep increasing, at least for the next 20 years, as more and more baby boomers hit their 60s, 70s, and 80s. By 2030, the over-65 crowd will expand to 72 million people, up from 40 million in 2010.

The increasing numbers of recent retirees, along with the hordes of people waiting at the gates, give politicians headaches as they try to figure out how to finance Social Security and pay the medical bills covered by Medicare.

But for those of us looking to invest in the American economy, this burgeoning population means an increasingly lucrative market for products and services focused on the elderly. By the time they're done, some 78 million baby boomers will have survived millions of hip replacements and heart transplants, swallowed trillions of Advil and Viagra, and consumed billions of boxes of bran and packages of prunes.

Despite the faltering economy of the last five years, American seniors are richer than ever, in large part because more older people, especially older women, are working than in previous decades. According to a 2012 report from the Federal Agency Forum, the number of senior citizens living in poverty has declined from 15 percent to 9 percent since the mid-1970s, while the proportion of older Americans enjoying a "high income" increased from 18 to 31 percent.

So even while the burgeoning number of retirees will strain government resources, they will provide enormous money-making opportunities for public companies. These people will travel. They will move to warmer and friendlier climates. Many will manage their IRAs and 401(k)s through financial institutions. They will buy long-term care insurance, pay rent to senior citizen facilities, and drop an average of $8,000 per funeral.

At least one financial firm has taken the trend seriously enough to create an "Aging Population Index" of stocks expected to profit from baby boomers. The list comprises over a dozen individual companies, from drug maker Celgene (CELG) to hotel chain Wyndom (WYN). These stocks may or may not be good investments. Unless you read their balance sheets and income statements, and know something of their future plans, how would you know?

The smart way to invest in baby boomers is to identify a trend, then let a reputable expert pick the specific companies that will likely benefit from those prevailing winds. Here are three ideas:

1. Medical care. It doesn't take hard-won experience to realize that older people use more medical products than younger people do. The average 70 year old gulps about three times more prescription drugs than the typical 40 year old. Vanguard has a mutual fund called Vanguard Health Care Fund (VGHCX), headed by Jean Hynes, that will provide honest, intelligent, and low-cost exposure to the industry. It earns four stars in the Morningstar rating system. Fidelity also has a four-star fund in its Select Pharmaceuticals fund (FPHAX) and a five-star fund in the Select Biotechnology Portfolio (FBIOX), helmed by Harvard-educated Rajiv Kaul. There are also a number of medical care ETFs, including Vanguard Health Care (VHT).

2. Finance and insurance. Retirees are increasingly responsible for their own savings, income, and financial futures. Money managers are developing more and more products to meet this need, from annuities to reverse mortgages to asset management. But again, are you in a position to know whether J. P. Morgan or Morgan Stanley is the better investment (or even know the difference between the two companies)? Vanguard has an ETF, called Vanguard Financials (VFH), that invests in over 400 financial stocks. Schwab has a three-star financial mutual fund (SWFFX), and the Burnham Financial Services fund (BURKX) rates four from Morningstar.

3. Consumer products. Older people may not buy that many jeans or video games. But they do purchase plenty of personal care products, from wrinkle creams to special cleansers to adult diapers. Vanguard offers an ETF called Vanguard Consumer Staples (VDC). Fidelity has a four-star consumer staples fund, Fidelity Select Consumers Staples Portfolio (FDFAX), run by a Wharton graduate. The Rydex Consumer Products Fund (RYCIX) is also rated four stars. These funds invest in companies like Procter & Gamble, which cooks up the fiber supplement Metamucil, and Kimberly Clark, which deals out Depends.

There's no guarantee that investing in any of these funds will produce better results than putting your retirement savings in a low-cost index fund. But can 78 million baby boomers be wrong?

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.

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