Why rebalance in retirement?

[corn18]

I retired Mar of this year. In the accumulation phase, I never had to rebalance because I was contributing enough each year to buy whatever I needed to maintain my 60/40 AA. Last year, I decided to go to 50/50 but just used my separation package to get to that. Easy peasy.

Since I went to 50/50, I haven't had any additional income but my stock AA went up to 56.1%. My current IPS says rebalance when it's out more than 5%, so I did. I am a good boglehead. But now I'm thinking "Why bother?". Just let the market do it's thing and use my withdrawals each year to rebalance back to 50/50. Seems obvious, but I will need to rewrite my IPS for retirement vs. accumulation.

Am I thinking about this correctly?

 

[PaunchyPirate]

Makes sense. I would not do a structured "rebalance" if my upcoming spending was certainly going to solve the problem. Unfortunately, you don't know if your withdrawals will match up to what the market is going to do until time has passed.

I withdrawal money from and re-invest dividends into whatever source (stocks vs. bonds) is the most out of line at that point in time.

 

[rodi]

Using your withdrawals to rebalance *is* rebalancing.

My personal plan is to check quarterly or if there is a huge swing in the market. If it's out of balance by more than 5%, I rebalance. If it's within that 5% I rebalance when I make my withdrawal. Sometimes I have enough paid out divs/cap gains that I don't have to sell anything when I withdrawal... but I'll still take the opportunity to rebalance at that time (after dividend/cap gain season in December.)

I guess you should look at two things for your IPS:
- frequency of rebalance checks. (maybe change it to annually)
- percentage out of wack to retrigger a rebalance. (Maybe change it to 10%)

 

[street]

Corn, that is a very great question and rebalancing has been hashed over many times here with pros and cons.

My status has been in 40 years of being active in the markets I have not rebalanced once. That is I never changed or sold any funds to change my AA.

I let it go where the markets/price takes my AA. I feel I have done as good as any others that rebalance. I do beleive there are some that rebalance to try to out guess the future. I do know many that rebalance once a year to stay on track with a set AA.

I'm not saying it is wrong either way to rebalance I personally don't see the advantage for me to do so. My investments are not ear marked for my expenses for living.

I have read article and read where people have showed where it really doesn't make a difference for the long haul and not doing anything actually was a touch better.

 

[corn18]

Corn, that is a very great question and rebalancing has been hashed over many times here with pros and cons.

My status has been in 40 years of being active in the markets I have not rebalanced once. That is I never changed or sold any funds to change my AA.

I let it go where the markets/price takes my AA. I feel I have done as good as any others that rebalance. I do beleive there are some that rebalance to try to out guess the future. I do know many that rebalance once a year to stay on track with a set AA.

I'm not saying it is wrong either way to rebalance I personally don't see the advantage for me to do so. My investments are not ear marked for my expenses for living.

I have read article and read where people have showed where it really doesn't make a difference for the long haul and not doing anything actually was a touch better.

I like not doing anything. I will have to withdraw something each year until SS kicks in, so I'll just do that in January for that year and use that to rebalance if I feel like it.

 

[marko]

I have read article and read where people have showed where it really doesn't make a difference for the long haul and not doing anything actually was a touch better.

+1 Buffett made some quip about the best strategy is doing nothing.

My dividends and cap gains are set aside automatically (for later withdrawal) and I find that tends to re balance me in the process YoY.

 

[street]

One more thing i forgot to add to first post. In the ~ 40 years of being in the markets I start with a ~74% equites and today I'm at ~78% equities. It was never in my master plan to lower my equity percentage so it has worked great for me.

 

[EastWest Gal]

Rebalancing in retirement is selling high and not buying low. It works out. My equity percentage has crept up but rebalancing by selling and buying results in paying taxes for nothing, so we're letting it slide a bit. When there is a market correction, We'll see if we need to do anything at all. The corrections may rebalance things for us anyway.

 

[chassis]

Why rebalance? It depends on one’s goals.

There was a post recently on this site or b/heads that said - why change the horse that got you to this point?

My feelings exactly. My hope or “plan” (God is laughing now) is to leave as sizable an estate as possible, and to do that I expect to run what brung me. High equity allocation with relatively high vol.

 

[rodi]

Rebalancing in retirement is selling high and not buying low. It works out. My equity percentage has crept up but rebalancing by selling and buying results in paying taxes for nothing, so we're letting it slide a bit. When there is a market correction, We'll see if we need to do anything at all. The corrections may rebalance things for us anyway.

I agree there can be tax implications - but not if you rebalance using the tax deferred (IRA) accounts. I look at the total investments for my asset allocation - but only buy/sell to rebalance using funds in my IRAs

 

[MichaelB]

Rebalancing is a way to manage risk. When it comes to investing there are really only two things we can control. One is portfolio expense and the other is risk.

Rebalancing does not lead to higher returns but it can contribute to a reduction in portfolio volatility, and this improves the portfolio survival rate. For many of us that is critical.

 

[Dtail]

I agree there can be tax implications - but not if you rebalance using the tax deferred (IRA) accounts. I look at the total investments for my asset allocation - but only buy/sell to rebalance using funds in my IRAs

Same here.

 

[corn18]

I'm not really questioning the pros/cons of maintaining an AA, just how you do it. I'm a newbie at retirement so it just seemed silly to me to do a dedicated, stand alone rebalance in July when I could just let it go until I make my annual withdrawal the following Jan and fix things up then.

I'll rewrite my IPS to just rebalance when I withdraw. I've been mindlessly following my IPS since I wrote it 5 years ago. If I think too much, I do stupid things. "Don't think, Meat, just throw!"

 

[Markola]

Sounds like everyone is in relative agreement so far. On Portfolio Visualizer I’ve modeled daily, quarterly, annual, bands, random and no rebalancing and have satisfied myself that there is almost no difference over a few cycles.

I’d be interested to know whether there’s data about whether selling appreciated assets for spending needs, rebalancing in the process, is superior to selling all assets proportionally for spending cash? The latter would be like selling shares of a Target Date Fund, for example. I suspect there is zero difference over time but haven’t seen it modeled.

 

[audreyh1]

Using your withdrawals to rebalance *is* rebalancing.

Exactly!

 

[audreyh1]

Rebalancing is a way to manage risk. When it comes to investing there are really only two things we can control. One is portfolio expense and the other is risk.

Rebalancing does not lead to higher returns but it can contribute to a reduction in portfolio volatility, and this improves the portfolio survival rate. For many of us that is critical.

+1

 

[chassis]

Sounds like everyone is in relative agreement so far. On Portfolio Visualizer I’ve modeled daily, quarterly, annual, bands, random and no rebalancing and have satisfied myself that there is almost no difference over a few cycles.

I’d be interested to know whether there’s data about whether selling appreciated assets for spending needs, rebalancing in the process, is superior to selling all assets proportionally for spending cash? The latter would be like selling shares of a Target Date Fund, for example. I suspect there is zero difference over time but haven’t seen it modeled.

@Markola The first example you gave, as you noted, accomplishes some rebalancing. The second example does not rebalance. If there are different tax implications in the assets sold, this would play into the "which one is superior" question.

Whether or not rebalancing is a useful idea remains open for discussion in my view. I realize rebalancing is part of retirement planning conventional wisdom (kool aid). I question conventional wisdom in most cases, this being one of them.

 

[Markola]

To clarify, by “superior” I meant returns. A lot of people sell only appreciated assets in their cash generation/rebalancing efforts. Assuming a tax advantaged account without tax implications, I wonder if that tactic makes an appreciable difference to portfolio returns long term vs. selling all assets in proportion as one would by selling a balanced fund’s shares? I doubt it.

 

[RobbieB]

I've always been heavy on equities, 80%. I think I got down to 75% on a rebalance bond buy, but it's back to 80 again. And I never sell bonds, just stocks. So I hit the stocks hard every January for dough to blow and it just grows back like a dogpatch ham.

I've got enough bonds to go 5 years, so not much worry about that, not to mention the bond performance compared to the stocks is like watching paint dry vs NASCAR

 

[CRLLS]

Rebalancing is a way to manage risk. When it comes to investing there are really only two things we can control. One is portfolio expense and the other is risk.

Rebalancing does not lead to higher returns but it can contribute to a reduction in portfolio volatility, and this improves the portfolio survival rate. For many of us that is critical.

A few years back my Fido rep ran a few simulations on balancing vs not. In my case, not rebalancing over time gave slightly higher ending balance at the expense of higher volatility. I can't remember what the starting AA was, perhaps it was 60/40 or 75/25. I really can't remember. I do not rebalance and have not ever. With other I have a higher risk tolerance than most and feel I can can survive large fluctuations.

 

[street]

A few years back my Fido rep ran a few simulations on balancing vs not. In my case, not rebalancing over time gave slightly higher ending balance at the expense of higher volatility. I can't remember what the starting AA was, perhaps it was 60/40 or 75/25. I really can't remember. I do not rebalance and have not ever. With other I have a higher risk tolerance than most and feel I can can survive large fluctuations.

Interesting!!! I have read and seen through the years from others that run the same simulations with the same results.

Risk, is always there but when talking risk, time needs to be in that same equation.

Control is also a choice but having control and making that move may not be the best all the time either. I sometimes in life found out having control hasn't been the best tool in the bag.

There is no step by step procedure that is a total guarantee for the best outcome. I wonder why there isn't?

 

[RobbieB]

You could do it if you have good crystal ball.

 

[DrRoy]

I not only rebalance, I also have a "glide path" where as our NW rises, I have a lower target equity AA. I have a chart where I record the targets vs. NW, and I have had to extend it several times over the last couple years as we are hitting levels of wealth that I never expected.

 

[Closet_Gamer]

In principle, rebalancing should always serve as a non-emotion driven way to sell assets that currently priced high relative other options to purchase assets that are currently priced relatively low.

This should be true regardless of when one is doing it -- though like most here I've found that using cash on the way in handles it and suspect I will find that creating cash to take out will accomplish the same in retirement.

Rebalancing does not lead to higher returns but it can contribute to a reduction in portfolio volatility, and this improves the portfolio survival rate. For many of us that is critical.

MichaelB, can you say more on the lower volatility = higher survivability point?

Unless one is operating very near the margin of success/failure, not sure when that would happen?

Thanks.

 

[mrfeh]

Rebalancing is a way to manage risk. When it comes to investing there are really only two things we can control. One is portfolio expense and the other is risk.

Rebalancing does not lead to higher returns but it can contribute to a reduction in portfolio volatility, and this improves the portfolio survival rate. For many of us that is critical.

+1

For the OP - just know that if you don't rebalance, the firecalc results you have are not accurate, as it assumes a constant AA.