It’s been a rough year for retirement savers.
With the U.S. already facing a retirement crisis, people watched the balances in their workplace retirement savings plans shrink this year as the slump in stock and bond markets hit nearly every popular 401(k) fund. Adding insult to injury, high inflation also took a bite out of savings.
But there’s some positive spin after the very bad year, at least for people who aren’t close to retirement: The outlook for stocks and bonds has started to improve.
“This year was hard in terms of returns, but that has really increased the expected returns going forward,” said Nathan Zahm, head of goals-based investing in Vanguard’s Investment Strategy Group. “You have a better outlook now than you did 12 months ago, when equity valuations looked very stretched and bond returns were 1.5%.”
To be sure, Vanguard’s baseline expectation is for a recession in 2023. But the company’s longer-term outlook is annualized returns for U.S. and international bonds of about 4% to 5% over the next decade, and for roughly 7% to 9% per year from non-U.S. stocks. (Vanguard’s forecast for U.S. stocks is 5% to 7% over that period.)
“Anyone with a longer-term mindset has a lot to be excited about,” Zahm said.
People can also put more money into tax-advantaged retirement plans in 2023. The amount that can be contributed to workplace savings plans such as 401(k)s is now $22,500, a $2,000 gain from 2022, and the amount of allowed “catch-up” contributions for savers age 50 and older now stands at $7,500, up from $6,500.
Deep Drops
Simply saving more is the most basic way to try and recover from 2022’s carnage, when prices on some of the most popular actively managed funds in 401(k) plans dove deep into the red.
The T. Rowe Price Blue Chip Growth Fund (TRCBX) had plummeted nearly 42% in price, and Harbor Capital Appreciation Fund (HNACX) had fallen more than 37%, through Dec. 19. The Vanguard 500 Index Fund (VFIAX), meanwhile, was down nearly 20%.
Even more broadly diversified funds, such as target-date funds (TDFs), which many 401(k) savers are automatically enrolled in, suffered. These funds divvy up money between asset classes and automatically become more conservative as savers near an assumed retirement age.
At Vanguard, by Dec. 19 its roster of TDFs showed price drops ranging from 13.8% for its 2020 fund (VTWNX) to 18% for its 2050 fund (VFIFX). Fidelity Freedom funds saw losses ranging from 20.1% for its 2025 fund (FFTWX) to 24.4% for the 2040 fund (FFFFX).