Asset Allocation - When To Balance?

[Triton461]

I just recently went into semi-retirement. I'll be working part-time and maybe full-time for the next 4.5 years (I'm 50.5 years old). My current asset allocation yields 1% to 1.7% per year, and although I have a substantial amount saved, I'd feel more confident about maintaining that growth for at least the next 4.5 years. My question is, when should I rebalance to achieve consistent gains and safety from market fluctuations (ie less risk)? 55? 60? 65?

I'm currently in a minority in that I leverage a financial advisor and we're just starting to delve into these topics. My current asset allocation is as follows: 72.1% US Equities, 10.9% International Equities, 1.5% Emerging Markets, 3.3% Real Estate, 4.5% US Bonds, 0.6% International Bonds, 3.2% Cash and 3.9% Other (EX JGRO).

 

[braumeister]

What does your FA advise, and why?

 

[Triton461]

What does your FA advise, and why?

We're talking this afternoon. This post is for me to pre-plan.

 

[TheWizard]

OP is high in equity holdings.
I think the answer depends on how much your investments total up to vs your income needs in retirement.

Example: if you have $5M in investments and need $100k per year from that stash for expenses, then you're looking at a 2% withdrawal rate, which is fairly low.
At that level, you may not need a lot of bonds; it depends on your risk tolerance...

 

[Triton461]

OP is high in equity holdings.
I think the answer depends on how much your investments total up to vs your income needs in retirement.

Example: if you have $5M in investments and need $100k per year from that stash for expenses, then you're looking at a 2% withdrawal rate, which is fairly low.
At that level, you may not need a lot of bonds; it depends on your risk tolerance...

Total investments are at $3.1M. I'll need (maybe) $40k per year from 51 - 55 to subsidize part-time work and then would switch to $80k per year as I stop working part-time. I've got a farily good risk tolerance and "feel" like the next 4 years will be a decent growth period, which is why I want to leave things as they are for now, but start planning toward less volatility.

 

[PaunchyPirate]

Well, off the top of my head, you appear to be stacked with a lot of equities. I'd suggest you start transitioning to a higher bond value. As to "where" you should be doing the rebalancing, that will vary. But if you go the route of adding bonds you generally would want to do that in a pre-tax account such as your traditional IRA/401k. You want stocks in any Roth IRA or HSA. You want stocks in a taxable account as much as you can. If you need to buy bonds in a taxable account, then municipal bonds may be best. Or, you may want to start putting more money into a money market fund in taxable and call that "bonds". This would give you ready cash to spend as needed in retirement. Those are just a few thoughts based on what I have done while navigating retirement from age 56 to my current 63. But, yes, your financial advisor should be planning this all out for you. That's what you pay him/her for.

 

[perez99]

One way to go about it is to determine how many years of withdrawals you want to have not at risk of a downturn in equities. Then use that to compute how much of your investments should be in bonds, HYSA or any other fixed investments. Example: you may want to have the funds for the next five years ($40K x 5 = $200K) in fixed income, then the balance in equities. Kind of like the buckets system, but no need for buckets. you can adjust the amount at any time later. Easier to do it in pre-tax account as mentioned here before

 

[Triton461]

Well, off the top of my head, you appear to be stacked with a lot of equities. I'd suggest you start transitioning to a higher bond value. As to "where" you should be doing the rebalancing, that will vary. But if you go the route of adding bonds you generally would want to do that in a pre-tax account such as your traditional IRA/401k. You want stocks in any Roth IRA or HSA. You want stocks in a taxable account as much as you can. If you need to buy bonds in a taxable account, then municipal bonds may be best. Or, you may want to start putting more money into a money market fund in taxable and call that "bonds". This would give you ready cash to spend as needed in retirement. Those are just a few thoughts based on what I have done while navigating retirement from age 56 to my current 63. But, yes, your financial advisor should be planning this all out for you. That's what you pay him/her for.

Most of the equities are in my IRA.

 

[USGrant1962]

This is a popular article around here that discusses the "retirement red zone" (the years shortly before and after retirement) and a bond tent strategy as one approach.

The Portfolio Size Effect And Optimal Equity Glidepaths

How the portfolio size effect impacts the optimal asset allocation glidepath of a lifecycle or target date fund, and how a bond tent reduces volatility risk.

www.kitces.com

 

[equakesfan]

I want to have 10 years of expenses in cash and bonds (fixed income). if your expenses are 80k/year I'd want $800k in bonds and cash. Since your working part time for $40k for the next 5 years ($200k) I'd want $600k in cash and bonds now and increase $40k/year over the next 5 years. You can do less because you could work part-time longer or go back to work as you are still young.
I use the formula (Age+30)/100*10 years of expenses = cash and bonds, but I'm not working part-time (and have no plans to work). In your case (51+30)/100*800k=~$650k cash and bonds

 

[Original Wally]

Similar problem: With the HUGE run up in equities over the recent time span, my allocation is out of whack. The problem is that to re-balance I would incur some hefty LTCG. PLUS the notion that there is "likely" (or not) a huge market correction coming. The LTCG tax would most likely be WAAAYYYYYY less hurtful than a (say) 25% drop in equities. Sigh. With the new $12k deduction for the next few years I COULD make some moves without it hurting too bad.

 

[imjustawarrior]

There is a lot of good information in this article: SWR Series

It is long, but it covers everything. I think this is a must read going into retirement.

FWIW, I retired at 55 (DW 48). I chose a 75/25 AA because of the long retirement. It could be 50 years for DW.

If you have a low WR, then any AA from 25/75 to 100/0 is probably okay.

 

[SecondCor521]

Total investments are at $3.1M. I'll need (maybe) $40k per year from 51 - 55 to subsidize part-time work and then would switch to $80k per year as I stop working part-time. I've got a farily good risk tolerance and "feel" like the next 4 years will be a decent growth period, which is why I want to leave things as they are for now, but start planning toward less volatility.

My AA is mechanistic. It's based on my current FIRE stash, some future income streams and lump sums, my current spending, my life expectancy. My "feelings", the state of the economy, what the Fed chair might do next week, which political party controls which parts of government, and my friends' opinions are not inputs.

As someone who mostly is an efficient market person, I think that the risks of strategic rebalancing and trying to navigate the economic ebbs and flows and trying to find undervalued and overvalued parts of the markets outweigh the benefits long term. That being said, there are plenty of people here who are very smart and have vibrant discussions about strategic market navigation. I wish them well, and you'll probably get thoughtful insights from them on that sort of approach.

 

[Midpack]

I use the 5/25 rule for rebalancing. But TBH I usually don't even then when I look at the tax impact from capital gains. I'm in the midst of large Roth conversions, so I don't want any more income to report. Like another post mentioned above, I'd carefully consider the tax impact of rebalancing no matter what timing/method you choose for rebalancing.

As the OP mentions, it seems a correction is just a matter of time, so I'm not too worried about my current equity allocation. It will fix itself one of these weeks/months/years.

And when I was working, I almost never did any rebalancing thru selling, because of the tax impact. If my equity allocation got too high, I just put all my new contributions in fixed income to get our AA back in line. No help to retirees without income, though you could divert all dividends to non equity holdings, might help a little.

The Larry Swedroe 5/25 Rule - A Wealth of Common Sense

Using a technique from a Larry Swedroe book to explain the benefits of portfolio rebalancing.

awealthofcommonsense.com

 

[easysurfer]

Once a year is fine for me.

 

[WhenIsItTime]

I just recently went into semi-retirement. I'll be working part-time and maybe full-time for the next 4.5 years (I'm 50.5 years old). My current asset allocation yields 1% to 1.7% per year, and although I have a substantial amount saved, I'd feel more confident about maintaining that growth for at least the next 4.5 years. My question is, when should I rebalance to achieve consistent gains and safety from market fluctuations (ie less risk)? 55? 60? 65?

I'm currently in a minority in that I leverage a financial advisor and we're just starting to delve into these topics. My current asset allocation is as follows: 72.1% US Equities, 10.9% International Equities, 1.5% Emerging Markets, 3.3% Real Estate, 4.5% US Bonds, 0.6% International Bonds, 3.2% Cash and 3.9% Other (EX JGRO).

What does it mean your current AA yields 1-1.7% per year? Is that the FA fee?

The flip-side of 'growth goals', is 'needs'. I retired <50 years old w/kids at home. I make sure I have 3 years of spend in safe places so I won't have to sell equities in a down market.

 

[yakers]

DW & I are at the age for required RMDs so any adjustments to our AA comes from deciding where to take them from. Usually some MM Holding gathered from dividends. I have a very wide AA anything between 70/30 and 50/50, was 62/27/11as of EOY2024. I cant remember any time since DW retired in 2006 and me in 2008 that we actively sold something to rebalance. Still there is a bit of rebalancing for RMDs and I dont see that changing unless the market really declines and then there might be some buying.
Also our largest holding are balanced funds (VG Global Wellington, Wellesley and (US) Wellington so they pretty much adjust themselves.

 

[Triton461]

What does it mean your current AA yields 1-1.7% per year? Is that the FA fee?

The flip-side of 'growth goals', is 'needs'. I retired <50 years old w/kids at home. I make sure I have 3 years of spend in safe places so I won't have to sell equities in a down market.

I must not have had my coffee yet when I typed that ...I may have been thinking per month. The entire portfolio does about 8% to 10% per year.

 

[engineernerd]

Two things most of us recommend to those who have not done so yet:

(1) Read this "sticky" post in the Early Retirement FAQs forum: Some Important Questions to Answer Before Asking - Can I Retire?

(2) Use FIRECalc. To get started you can click on "FIRECALC" at the top, next to "MEMBERS." If it looks very simple to you, that's because you haven't examined all the tabs.

One FIRECalc feature you will want to use, once you have all your inputs figured out, is the "Investigate changing my allocation" choice, in the Investigate tab.

Turns out, how much someone should have in stocks depends quite a bit on the size of their portfolio compared to their spending needs. The more a person is attempting to make a small portfolio stretch to cover their spending needs, the higher their optimal stock allocation will be, to minimize the odds of running out of money before they die.

FIRECalc's greatest strength is its use of historical data going back a long time to "test" how well you would have done if you had retired in 1871, or 1872, or 1873, etc. Since things like inflation and stock appreciation tend to affect each other in real life, this seems much more realistic to me than Monte Carlo simulations.

One of FIRECalc's weaknesses is you can't tell it to alter your stock allocation with time the way a lot of traditional investment advisors say you should (percentage of your age type advice). You have to choose your percent in stocks and run with it.

 

[HMMY]

I was 80/20 until I had enough. Then I went to 70/30 and to 55/45 when I retired at 52. The fixed income was about 15 years of expenses, enough to get me to SS. I last rebalanced during Covid, selling bonds for stock. I am 59 now and have 10 years of expenses left in fixed income. At 70, SS and dividends will cover all my fixed expenses. I'm on a glide path to eventually be mostly stock with 5 years of expenses left in fixed income so I can sleep well at night.

 

[Banyan]

I just recently went into semi-retirement. I'll be working part-time and maybe full-time for the next 4.5 years (I'm 50.5 years old). My current asset allocation yields 1% to 1.7% per year, and although I have a substantial amount saved, I'd feel more confident about maintaining that growth for at least the next 4.5 years. My question is, when should I rebalance to achieve consistent gains and safety from market fluctuations (ie less risk)? 55? 60? 65?

I'm currently in a minority in that I leverage a financial advisor and we're just starting to delve into these topics. My current asset allocation is as follows: 72.1% US Equities, 10.9% International Equities, 1.5% Emerging Markets, 3.3% Real Estate, 4.5% US Bonds, 0.6% International Bonds, 3.2% Cash and 3.9% Other (EX JGRO).

I suggest you visit bogleheads.com read about index investing, lazy portfolio and asset allocation

 

[RetiredHappy]

We don't rebalance, but instead review their performance periodically and decide if certain holdings need to be swapped out for better etfs. 100% equities (have MYGAs separately).

 

[Dtail]

We are at 50/50 and rebalance when the ratio changes 5% either way. It does not happen that frequently.

 

[engineernerd]

Total investments are at $3.1M. I'll need (maybe) $40k per year from 51 - 55 to subsidize part-time work and then would switch to $80k per year as I stop working part-time. I've got a farily good risk tolerance and "feel" like the next 4 years will be a decent growth period, which is why I want to leave things as they are for now, but start planning toward less volatility.

Since you have a big portfolio compared to your expenses (WR below 3%), your asset allocation is unlikely to matter much unless you want to leave money for your heirs. Though according to FIRECalc analysis, it is good to avoid the extremes. You'd generally want to stay between 30% and 90% stocks. Too low and you can lose out to inflation, too high and you can lose out to a big dip in stock values timed badly (at or near the start of your retirement) that does not bounce back quickly.