Perspectives : Investment | February 16, 2023

TDF outlook: The silver lining in a stormy 2022

Read time: 14 minutes

2022 was an especially painful year for nearly all investors. The extended downturn deepened across both the stock and bond markets as the year went on, and 401(k) balances fell by the largest amount in a long time—with no apparent sign of a significant upturn.
And yet, for long-term investors, such as those in target-date funds (TDFs), the outlook for the next 10 years has brightened considerably. Vanguard’s projected long-term returns for stocks and bonds are significantly higher than they were one year ago. As previous bear markets have typically been followed by rebounds, investors can take hope from the lessons of history and what they mean for the future.

What happened in 2022?

Looking back on the past year, results weren’t just bad. They were historically bad. The equities and fixed income markets ended the year in double-digit negative territory, with U.S. stocks returning –19.49% and U.S. bonds returning –13.07%.1 Because both markets had such deep descents, returns from the traditional balanced 60/40 portfolio were among the worst in a long time.

The negative performance from bonds was especially dramatic, with U.S. bonds experiencing the worst year on record.2 Additionally, traditional asset classes used in TDFs, like international stocks and bonds, retreated along with more niche asset classes like real estate investment trusts (REITs) and long-term Treasuries.

In short, there were very few places to hide. Figure 1 shows the extent of the damage in the asset classes typically found in TDFs.

Figure 1. 

2022 year-end returns for asset classes

U.S. equities represented by the CRSP U.S. Total Market Index; international equities represented by the FTSE Global ex-U.S. All Cap Index; U.S. fixed income represented by the Bloomberg U.S. Aggregate Float Adjusted Index; international fixed income represented by the Bloomberg GLA ex-USD Float Adjusted Index; U.S. 10-year Treasury note represented by the Bloomberg U.S. Treasury Index; TIPS represented by the Bloomberg US Treasury TIPS 0-5 Index; U.S. long-term Treasury note represented by the Bloomberg Long-Term U.S. Treasury Index; real estate represented by the FTSE EPRA NAREIT Developed Index; commodities represented by the Bloomberg Commodity Index; and the 60/40 portfolio is comprised of 60% CRSP U.S. Total Market Index and 40% Bloomberg U.S. Aggregate Float Adjusted Index. All data provided through December31, 2022.

Source: Bloomberg, as of December 31, 2022.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Not the first downturn—and it won’t be the last

As painful as 2022 was, it wasn’t the first difficult period investors had been through. Staying the course and maintaining a long-term mindset is easy to say but not always easy to do. It can help to review past downturns to see what often follows.

TDFs have been around since 1994 and Vanguard Target Retirement Funds since 2003. Over that time, we’ve seen many different market environments. Most readers will remember the last prolonged major downturn we experienced during the global financial crisis of 2007–2009. Yet, despite the downturn, many investors were able to stay on the path to a successful retirement.

Impact of downturns on retirement success probabilities

More to the point for TDF investors, how does a bear market impact the likelihood of achieving a successful retirement? One of the critical elements of glide-path design is determining the likelihood that the average investor who contributes and saves consistently will realize a successful retirement—which we define as having accumulated assets that allow for the withdrawal of sufficient income until age 95 or beyond.

We found that there’s bad news and good news when looking at the impact of the recent downturn on probabilities of retirement success. Figure 2 shows two separate groups of investors on our Target Retirement Fund glide path: investors in the 2025 vintage (those nearing retirement) and the 2045 vintage (those with ~20 years until retirement).

It’s no surprise that the probability of success drops for both vintages, and the decline looks similar to what investors experienced in 2007–2008. But the good news is that even with the decrease, each vintage’s probability of generating enough wealth to support its cohort’s spending needs through the last year of life, or P(LYL) as we label it here, is still above 70% (82% and 74% for the 2045 and 2025 cohorts, respectively) and therefore beyond what we would deem to be sufficient.3

One interesting point of comparison is to look at how estimates of each vintage’s P(LYL) change across time. If we consider all conceivable or “steady-state” market scenarios, the expected P(LYL) at the start of a Target Retirement Fund investor’s life cycle is around 96%. For a particular vintage at a particular point in time, the P(LYL) will differ from 96% for two reasons: (1) because the past returns experienced by the cohort are observable and no longer need to be predicted and (2) because expectations about future returns will be updated with recent market information. Figure 2 shows how P(LYL) changes (relative to the 96% baseline) as a result of incorporating the observed past returns for each cohort. Looking back at 2007–2008, we found that while incorporating 2008 realized returns did lead to a sharp drop in projected P(LYL) for both vintages, this drop was followed by a swift rebound.

Finally, these figures assume no changes to either spending or saving behaviors by investors. If an investor wants to help offset the impact of a down market, slight changes to these behaviors can have a big impact. Let’s take a closer look at both the accumulation and decumulation phases.

Figure 2. 

Change in percentage of retirement success probability through the last year of life (LYL); prediction over time, by cohort

Source: Vanguard calculations, as of December 31, 2022.

Past performance is no guarantee of future returns.

Accumulation phase: Darkest before the dawn

Saving for retirement is like a marathon for TDF investors who are in their accumulation stage with still many years to grow their assets.

Because the chances of positive returns improve with the longer holding periods, retirement investors need to maintain some exposure to risky assets to provide sufficient growth. In difficult market environments, like we saw in 2022, watching declining balances can be stressful. But if investors can avoid making impulsive investment decisions, it can typically lead to a greater likelihood of meeting long-term return objectives.

There’s also a silver lining for those in the accumulation phase in this past year’s high inflation: Federal limits on retirement plan contributions rose considerably for 2023. The annual contribution limit for 401(k)s, 403(b)s, most 457 plans, and Thrift Savings Plans is now $22,500, up from $20,500 in 2022.

Individuals over age 50 are also eligible to make catch-up contributions to their 401(k). This means that these individuals can contribute more than the $22,500 limit. The IRS increased the catch-up contribution limit from $6,500 in 2022 to $7,500 in 2023. In total, employees over age 50 can contribute up to $30,000 to their 401(k).

Combined with the ability to invest higher amounts at today’s lower prices, participants could see 2023 as an opportunity to improve their retirement outlook. Accelerated savings can help offset market downturns, and saving more consistently has a much bigger impact on achieving retirement success compared with asset allocation or market performance.

The other piece of good news from this year’s damage: Our forward-looking return expectations have improved significantly. Falling equity valuations and rising interest rates have dramatically increased our 10-year annualized return forecasts for developed markets. For example, a year ago, with U.S. stocks at all-time highs, our long-range forecast for stocks was only 2%–4%. Now we project U.S. stocks could return 4.7%–6.7% annually, on average, during the next decade.

For U.S. bonds, our average annual projections for the next 10 years are similarly elevated—from 1.4% to 2.4% a year ago to our latest expected range of 4%–5%. Our projections for international stocks and bonds are also higher. As a result, our median expected return from a 60/40 stock bond portfolio is up 2 percentage points from this time last year.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of 12/31/2022. Results from the model may vary with each use and over time.

Decumulation phase: Stay the course and adjust spending if needed

What about those investors who recently retired or are well into retirement? In the decumulation phase, pulling income from their portfolios while markets nose-dive can be worrisome.

Retiring in a bear market magnifies “sequence of returns” risk—the risk of receiving a concentrated series of particularly poor returns in the earlier years of retirement when retirees are depending on their retirement savings to generate income. These adverse effects can be mitigated with something as simple as an adaptive and dynamic withdrawal strategy. By responding to an unexpected decline in portfolio value with an incremental decrease in planned withdrawal amounts, even those bearing the worst sequence of return risk can reduce or eliminate the possibility of prematurely depleting their portfolio.

For example, our research shows that retirees who used a dynamic spending strategy—adjusting spending levels up or down based on the market environment—essentially eliminated the risk of portfolio depletion, including those who retired during a bear market.4 Adjusting spending by as little as 5% can dramatically increase an investor’s probability of success. While this may lead to a short-term decrease in spending ability, it allows an investor to navigate rough patches like those in 2022 and help ensure that their accumulated assets continue to last throughout retirement.

The big picture

As difficult as 2022 was, we know that many investors have experienced disappointing years like this before and, at some point, will again. This kind of market adversity, or “Vanguard weather” as we sometimes call it, has proven to be a time of opportunity. Participants can be encouraged to remember that the markets have always come back, no matter how steep the losses in a bearish environment.

Despite recent geopolitical tensions, economies around the world continue to grow, innovate, collaborate, and compete in productive ways. Equities and fixed income securities remain the foundational investments for benefiting from this dynamism to build long-term wealth.

The takeaway for TDF investors: remain committed to a multiasset, diversified retirement game plan. We believe most TDF investors are best served by looking past the short-term setbacks and staying focused on the long-term goal of investing for a successful retirement. Looking past the market declines of 2022, investors may see opportunities to improve their investment portfolios using an accelerated savings strategy. For those who are in or near retirement, navigating the current market environment may require a manageable reduction in retirement income to offset declines in portfolio value. Regardless of where they are in their retirement journey, making slight adjustments to spending and saving behaviors could help TDF investors maintain financial well-being and ensure that they have sufficient income to last throughout their retirement years.

1 Source: Bloomberg.

2 Source: Morningstar, Inc.

3 These metrics rely on simulated Target Retirement Fund history (using index benchmarks), the most recently updated (2022) Vanguard Capital Markets Model predictions, and the cash flow assumptions for our baseline Target Retirement Fund persona (starting investment age: 25; retirement age: 65; starting income: $52,000; savings: 8%–12% of yearly income; retirement income: 79% of final income; Social Security: 37% of final income).

4 Source: Vanguard research, Sustainable Withdrawal Rates in Retirement: The Importance of Customization.


  • For more information, visit or call 800-523-1036 for Vanguard funds and 800-992-8327 for non-Vanguard funds offered through Vanguard Brokerage Services® to obtain a prospectus, or if available, a summary prospectus. Visit our website, call 866-499-8473, or contact your broker to obtain a prospectus for Vanguard ETF® Shares. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss in a declining market.
  • Investments in Target Retirement Funds and Trusts are subject to the risks of their underlying funds. The year in the fund or trust name refers to the approximate year (the target date) when an investor in the fund or trust would retire and leave the workforce. The fund/trust will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Trust/Fund and Income and Growth Trust have fixed investment allocations and are designed for investors who are already retired. An investment in a Target Retirement Fund or Trust is not guaranteed at any time, including on or after the target date.
  • IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
  • The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based. 
  • The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.