Tough on Quitters

Mike Zaccardi

JUST HOW ROUGH HAS 2022 been for retirees? Vanguard Target Retirement Income Fund (symbol: VTINX) is down nearly 6% so far this year. Barring a strong comeback, this could be among the lousiest years for this conservatively positioned mutual fund since its October 2003 inception.

The pandemic led to a rash of retirements. Soaring stock prices, booming real estate values and flexible work arrangements helped change the employment landscape. Many Americans finally called it quits in recent months. Likely, some workers stuck with their employer through Jan. 1 to nab another year of retirement benefits and perhaps one last year-end bonus.

Guess what happened next? The stock market’s lone 2022 all-time high was notched on the first trading day of the year—just as some clocked out for the final time. That might make the latest bout of volatility even more difficult to stomach for these newly minted retirees. A 10% decline in the market—which hadn’t happened since the COVID-induced drop two years ago—would have taken a massive dollar figure off the net worth of these retirees, whose nest eggs were likely at their plumpest.

Even more worrying might be the lack of cushioning from bonds. Interest rates were already heading higher before Russia attacked Ukraine. As rates rise, bond prices drop. When geopolitical risks mount, credit quality sometimes also gets called into question, causing corporate bond prices to fall. Combine those two bearish factors, and the Vanguard Total Bond Market ETF (BND) is down 7% from its early August 2020 peak, including dividends. After inflation, that’s a 16% loss in purchasing power.

While that might be unnerving, it also portends better future returns. Consider that high-quality corporate bonds now offer a yield of 3.5%. That’s almost double the rate from early last year. You might scoff at that, especially if you’re a longtime investor who can recall bond market yields north of 8% in the 1980s and ’90s. It goes to show that today’s investing landscape is no picnic—and we should get used to the notion that diversified portfolios will likely deliver modest returns.

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