Reflecting Back on a Testing Year and Looking Ahead to 2023

The annuity market is booming and for good reason. The economic and market upheavals experienced in 2022 were the perfect crucible for testing past paradigms and received wisdom about retirement planning and portfolio construction.

Clearly not all of them were up to the task. Old chestnuts like “a safe portfolio withdrawal rate is a sufficient retirement income plan,” or “bonds provide ballast to an equity portfolio,” or “advisors always know best what will work for their clients,” were cracked open by the definitive end of the longest bull market in history and the return of an inflation rate not seen since the heydays of disco.

And the test is not over yet. Following are some key takeaways from the year that was and some thoughts about what lies ahead.

Rethinking the 4% Rule & Managing Portfolio Risk

Retirement is more challenging than ever before with people retiring earlier and living longer, and sources of guaranteed income, like pensions, disappearing. This year’s market mess exposed the unnecessary and inherent risk in a 60/40 total return portfolio for retirement income. The market crashes of the past 15 years have shown diverse asset classes moving in unison down. Portfolio diversification no longer provides the measure of risk management it used to.

Unfortunately, clients and advisors were reminded of the significant risk a poor sequence of returns risk poses to retirement portfolios 100% invested in the market. The 30% stock market plunge this spring laid bare the limitations of the 4% Rule, a limited withdrawal guide dating to 1994 that evolved into a widely embraced retirement income strategy during the 13-year bull market.

With the Rule’s creator, Bill Bengen himself, abandoning the market and sheltering in cash during this year’s upheaval, we all were reminded that the 4% Rule was designed to be nothing more than a guide for portfolio withdrawals and not a retirement income plan. Bengen was not alone in abandoning his own guidelines for the 4% Rule as annuities saw historic inflows of an incredible $300B.