A Quick Portfolio Check That Can Help Retirees Sleep Better at Night

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Portfolio rebalancing is a simple trick that retirees can use to sleep better at night. When you know that your asset allocation is in line with your financial objectives and risk tolerance, you’re less likely to fall victim to worries about outliving your money or losing it all in a market crash. 

Research from Vanguard shows that a consistent asset allocation improves long-term performance and helps keep risk in check. This is why it’s essential for retirees in particular to run occasional portfolio checks, especially when stocks are at all-time highs.

How Rebalancing Works

Imagine you have a $500,000 portfolio and allocate 60% to stocks and 40% to bonds. This would give you $300,000 in stocks and $200,000 in bonds.

If stocks rally 30% while bonds remain flat, you’d end up with $390,000 in stocks and $200,000 in bonds. This would change your allocation to 66% stocks and just 34% bonds. 

While it may not seem like a big difference, your portfolio would now be courting more risk and volatility. A market sell-off might cause more damage to your portfolio than you imagined when you designed your target allocation. 

To rebalance your portfolio to its intended 60/40 allocation, you would have to shift $36,000 from stocks back into bonds. This would leave you with $354,000 in stocks and $236,000 in bonds. 

Tax Considerations

Unless you hold your investments in a tax-deferred account, such as a traditional IRA or a 401(k) plan, you’ll have to take taxes into consideration when you rebalance.

Long-term capital gains are generally taxed at rates of 0%, 15% or 20%, depending on income level. If you’re single with taxable income less than or equal to $48,350, or $96,700 for joint filers, your long-term capital gains rate will be 0%. This means your rebalancing will not trigger any capital gains tax. However, if your taxable income is higher, you should carefully weigh the benefits of rebalancing with potential tax cost and avoid selling positions too frequently. 

Steps To Rebalance

Rebalancing is simple, but there are some steps you shouldn’t overlook.

• First, build a target allocation in line with your investment objectives and risk tolerance.
• Next, review your portfolio annually or semi-annually, ensuring it matches your target allocation.
• Rebalance if any portion of your allocation rises or falls more than 5% from its original target.
• Keep in mind the tax consequences of frequent rebalancing; use tax-advantaged accounts whenever possible.
• Consider adding money to boost underperforming sectors of your allocation.

If you take these steps to keep your allocation in balance, you can sleep easy knowing that your portfolio is in line with your objectives.

Editor’s note: This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.

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