Our calculators have been updated with 2022 data for CPI, S&P 500, bond, and cash returns.

The story of 2022 was all about inflation finally rearing its ugly head. Rising prices sent the stock market crashing. In turn the Fed started raising interest rates aggressively. That tanked medium and long term bond valuations. The only safe haven was cash and short term bonds. However at the start of the year they were yielding practically nothing and still ended up with a negative real return for the year.

2022 raw numbers:

• The CPI (consumer price index) increased by a whopping 8.0%. Everybody is feeling the pinch in terms of food prices, rent, energy, etc. You have to go all the way back to 1981 to get a reading this high.  So, why did inflation take off in 2022?
  • One contributing factor was all the stimulus money the government pumped into the economy.
  • Another was historically low interest rates, which fueled spending both for consumers and businesses.
  • Supply chain issues, microchip shortages, and lingering economic effects from COVID all made it hard to get certain things. This encouraged companies to raise prices.
     
• The S&P 500 had a -18.01% return, the worst year since 2008.  
   
• The 90-day T bill had a 4.42% return, this is due to the Fed finally raising interest rates to try and combat high inflation.
   
• 10 year Treasury Bonds had a -17.38% return, the worse year EVER.
   

Our retirement calculators use backtesting based on historical data since 1928. 2022 was a terrible year for stocks and bonds, including the fabled 60/40 portfolio. The reason was the Fed had nowhere to go with rates and finally started raising them to combat inflation. This caused bond yields to go UP, which inversely causes bond values to DROP. 

When running the Retirement Withdrawal Calculator with default inputs the average resulting balance went down by $450k (-8.0%). The default settings are to retire with $1M (invested 70% stocks, 30% bonds), with an initial withdrawal amount of $40,000 that gets adjusted by the CPI every year, and to let it run for 30 years. 

• Average Resulting Balance    $5.30M (2017)
• Average Resulting Balance    $5.13M (2018)
• Average Resulting Balance    $5.34M (2019)
• Average Resulting Balance    $5.45M (2021)
• Average Resulting Balance    $5.60M (2021)
• Average Resulting Balance    $5.15M (2022 update)

Other results are the same, except the simulation low which creeped down about $2500:

• Simulations Ending Above Zero (money left over) 98.9%
• Simulations Ending Below Zero (money ran out early) 1.1%
• Simulation Low    -$202k (down about $2500)
• Simulation High    $16.08M

In terms of the outlook for 2023, if inflation subsides, which it seems to be starting to, things will be looking much better for stocks and bonds. Cash and short term bonds should do pretty well with no rate cuts on the horizon. However if inflation continues to stay high (above the 2% goal set by the Fed), it could be another year of down returns for both stocks and bonds.  Mortgage rates have spiked from around 3% to 7%, which is really slowing down the housing market. The auto market is also showing signs of slowing too. So the increased interest rates are slowly starting to reduce demand, which will reduce prices, which will in turn raise unemployment, and settle things down. If inflation falls too quickly the economy could enter a recession, which could be bad for stocks in the short term.  In other words, nobody knows what will happen.

What can we take away from the 2022 update? Mercifully, simulations ending above zero held steady at 98.9%. So the 4% "safe withdrawal rate" still worked just as good. That is pretty amazing considering how BAD 2022 was for stocks and bonds.
 

Associated Calculators:

• Inflation Calculator
• Saving for Retirement Calculator
• Retirement Withdrawal Calculator
• Portfolio Allocation Calculator
   

Data Sources:

• CPI data https://fred.stlouisfed.org.
• Stock market, bonds, and cash returns are from Professor Damodaran's Historical Returns spreadsheet.