Your retirement portfolio needs to be carefully adjusted to avoid running out of money in retirement. Sometimes one part of your retirement portfolio experiences significant growth or losses, and you need to shift funds from one part to another to maintain your ideal asset allocation for your risk tolerance. With volatile markets and increasing life spans, occasionally recalibrating your financial plan can help ensure that your savings will last for 30 years or more. A big part of that planning process involves continuing to rebalance your investment portfolio in the years leading up to retirement and after you retire.
Here’s how to rebalance your portfolio as you approach retirement:
— Discuss your retirement plans with your financial planner two to five years before retirement.
— How you rebalance will depend on when you need to begin withdrawals.
— Rebalance at least annually in retirement.
— Rules of thumb may not work for your personal situation.
— Make sure you have a sustainable withdrawal rate.
Discuss Your Retirement Plans With Your Financial Planner
Begin discussions with your financial planner at least a year or two before retirement, and preferably in the two to five years leading up to retirement. “Newer clients tend to come in and say, ‘Hey, I’m retiring in a month,’ which always catches us off guard,” says Brian Robinson, a partner at SharpePoint in Phoenix.
You need a portfolio review that includes not just rebalancing, but usually a strategic reallocation of the portfolio for retirement. “So, give it at least a year or year and a half, sometimes two years, depending on economic conditions,” Robinson says.
Some financial advisors recommend starting to transition your portfolio five years in advance of retirement. “You start to re-analyze the portfolio and discuss with your advisor any strategic changes that need to be made, and ensure that those changes have been implemented two to three years before retirement,” says Brooke V. May, managing partner at Evans May Wealth in Carmel, Indiana. “If you start to look at what your mix should be in retirement five years in advance, you can come up with a plan and then make adjustments to the plan and ensure that it’s actually implemented two to three years prior to retirement.”
Decide When You Need to Begin Withdrawals
The rebalance depends on when you will need the funds in retirement. Some people begin to draw from their portfolio immediately, while others semi-retire and put off withdrawals. “Some people want to have a portfolio that really just produces income,” Robinson says. “You can strategically set the portfolio up to do that.”
However, other people don’t need income from the portfolio for another few years because they continue working or have other sources of income. If you don’t need to draw on the portfolio immediately, the strategy is different. “Then you look at that as a longer-term portfolio. We’ll look at more of a growth style,” Robinson says. “It depends on economic conditions. Right now, we’re not really doing the growth style. It’s more value-based, dividend-based, defensive. But when things are normal, you definitely stick with that growth for quite a while until you get near that time frame where you start cutting back.”
Current market conditions can influence the investment strategy for people close to retirement or already retired. When markets are low, May advises clients who are five years from retirement to stay invested with a more equity-heavy allocation and then rebalance when there is a recovery. “If we’re two to three years out from retirement and equities seem high, we say we’ve had a great run, let’s go ahead and take some chips off the table and diversify and reduce the risk of the overall portfolio,” May says. “If we start those conversations five years in advance, we’ve got plenty of time to make strategic changes dependent on what’s going on in the market.”
Should You Change Your Asset Allocation in Retirement?
The old investing rules of thumb, such as 100 minus your age tells you what percentage of your portfolio should be invested in stocks, are outdated and could result in shortfalls. People live longer and need growth in their portfolio to ensure that their savings do not run out too soon. “We don’t use a hard and fast rule when applying the asset allocation,” May says. “It’s more important to understand one’s risk tolerance, and then figure out the mix that works best for them.”
Your risk tolerance might change as you age, but it doesn’t always, and many people continue to need growth into their retirement years. “We have clients who had been investors for decades and are in the later stages of their lives, but feel very comfortable with an all-equity portfolio and equity risk,” May says. “We have other clients who are very young, but can’t sleep at night as they take on the full volatility of equities and therefore need a balanced mix.”
How Often Should You Rebalance Your Portfolio in Retirement?
How often you rebalance in retirement depends on how aggressively the portfolio is invested. “Typically, we look at least annually to see if the holdings in the portfolio have gone out of balance by a specific percentage,” Robinson says. “The percentage that is determined depends on the tolerance of the investor, but a good place to start would be to rebalance those holdings that have strayed 5% or more from the base amount.”
Sometimes a portfolio will need to be rebalanced and even reallocated if the economic situation changes such that current holdings will be detrimental to the portfolio’s value. “For example, if you are heavy into longer term bonds going into an inflationary period with rising interest rates, you would want to reallocate the holdings to avoid the inevitable heavy downward price pressure,” Robinson says.
What Should Your Retirement Portfolio Include?
Your retirement portfolio should include an appropriate mix of stocks, bonds and cash. “We want to make sure that the mix allows for the ability to draw on the portfolio even if equities are down significantly,” May says. “Determining how heavily you need to draw from the portfolio and how comfortable you are with risk will help determine how much you need in stocks versus bonds versus alternatives.”
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