Is rebalancing a portfolio during retirement necessary?

The answer to this question is, absolutely yes! Rebalancing should always be part of a disciplined portfolio strategy because over time some assets appreciate while others lose value. Rebalancing— buying and selling certain asset classes— helps maintain the overall targeted balance of assets in a portfolio. In general, having a balanced portfolio is essential in making the most of your investments. Here are some benefits of rebalancing a portfolio, specifically during the retirement phase:

Managing Risk

Rebalancing helps keep risk in check by ensuring that the portfolio maintains its target asset allocation. As the value of different asset classes ebb and flow over time, the portfolio might drift from its desired allocation. Regular rebalancing can help bring the portfolio within the parameters of the target allocation, which can then reduce the risk of the overall portfolio.

Ensuring Appropriate Income

Retirees typically need to withdraw from their portfolios to meet their income needs. By rebalancing, retirees can ensure that their portfolios will continue to generate the income needed. When stocks outperform bonds, the portfolio is exposed to more risk. In this case rebalancing would be necessary to allocate the over exposure to stocks back to bonds.

Increasing Returns

In addition to managing risk, rebalancing can also potentially increase returns. By selling assets that have performed well and using the proceeds to buy underperforming assets (just like buying something on sale at a retail store), it becomes a buy-low, sell-high strategy designed to increase returns.

Adapting to Changing Circumstances

Many retirees think they have everything planned out, but nothing in life is certain. That’s why we tell clients that the financial plan is a living document. Retirees’ face changes such as health conditions, expense increases or decreases, or general changes to financial goals. Depending on the magnitude of these changes, rebalancing may be required in order to adapt to the changes and stay aligned with the ultimate goals.

Tax Efficiency

Rebalancing can also help manage the tax implications of a retirement portfolio. When assets are sold with realized gains (in taxable accounts), this presents a prime opportunity to sell assets with losses to help offset the overall tax liability. Another option to maximize tax efficiency while rebalancing is to move the more tax-inefficient assets to tax-advantaged accounts, so the income is not taxable. The key is to understand that rebalancing must be disciplined but not rigid. Regular rebalancing helps take the emotion out of portfolio maintenance. Managing to a target allocation becomes numbers driven, however, the human element can’t be overlooked. Keeping an eye on changing goals should lead to some flexibility and rebalancing becomes a blend of art and science. Having a fee-only fiduciary who has eyes on both your financial plan and your investment portfolio is central to financial success.

Have more questions? Contact Us

Missie Beach, CFP®, CDFA®
Senior Financial Advisor

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By Published On: March 1, 2023

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