Why rebalancing matters as you near retirement
As retirement approaches, the primary investment objective typically shifts from accumulation to preservation and income. Rebalancing ensures your portfolio reflects that shift: it reduces exposure to large stock losses that can severely erode withdrawals in early retirement (sequence-of-returns risk) and improves the probability your savings last through your expected retirement horizon.
In my practice working with near-retirees, the most common issue I see is portfolios that drift far from target allocations after a sustained market run. That drift leaves retirees either too risky—Exposed to large drawdowns—or too conservative—missing essential inflation-beating returns.
Authoritative background: the U.S. Securities and Exchange Commission provides a primer on retirement investing and the need to match investments to objectives (SEC: Retirement: Know Your Options). For tax and distribution rules, refer to the IRS guidance on Required Minimum Distributions (RMDs), which sets the current RMD age at 73 as of 2025 (IRS: Required Minimum Distributions (RMDs)).
Simple, repeatable rebalancing approaches
Choose a practical method and stick with it. Common, effective approaches include:
- Calendar-based rebalancing: review and rebalance annually (typical) or semiannually. Annual reviews are a reasonable baseline for most near-retirees.
- Threshold (band) rebalancing: rebalance when an asset class deviates by a set percentage (e.g., 5% or 10%) from its target.
- Cash-flow rebalancing: use new contributions or dividends to buy underweighted asset classes instead of selling winners.
A blended approach often works best: calendar reviews with threshold actions in volatile markets.
Step-by-step plan to rebalance before retirement
- Confirm goals and time horizon.
- Define your retirement start date, expected spending needs, and sources of guaranteed income (Social Security, pensions, annuities).
- Build a target allocation.
- For many near-retirees this means lowering equity exposure and increasing bonds and cash; typical illustrations include shifting from 60/40 (stocks/bonds) toward 50/50 or 40/60 depending on risk tolerance and other income sources.
- Calculate current allocation across all accounts (taxable, tax-deferred, Roth, and employer plans).
- Choose a rebalancing method (calendar, threshold, cash-flow).
- Execute with tax efficiency in mind (see taxable vs tax-advantaged section).
- Maintain a liquidity buffer: hold 1–3 years’ expenses in cash or short-term bonds to fund early retirement withdrawals and avoid forced sales during downturns.
Example: You target 50% stocks / 50% bonds across all accounts. If market gains move stocks to 70%, you need to reduce stock exposure by 20 percentage points (sell equities or redirect new cash) to return to target. If you have $1,000,000 total, that means shifting $200,000 from stocks into bonds or cash-equivalents.
Account-type and tax considerations
How you rebalance depends on whether assets sit in taxable, tax-deferred (traditional IRA/401(k)), or Roth accounts:
- Taxable accounts: prefer in-kind transfers and tax-efficient lot selection before selling—use tax-loss harvesting where appropriate and be mindful of short-term vs long-term capital gains. See best practices in our guide on Using Tax-Efficient Lots When Rebalancing Taxable Accounts.
- Tax-deferred accounts (traditional IRAs/401(k)): rebalancing is tax-free within the plan, but consider future tax rates—large sales inside these accounts do not create current tax, but withdrawals later will be taxed as ordinary income.
- Roth accounts: ideal places to hold higher-growth assets because qualified withdrawals are tax-free; avoid unnecessary Roth sales unless rebalancing across account buckets requires it.
Tax planning strategies to coordinate with rebalancing:
- Roth conversions: consider incremental Roth conversions in years when your taxable income is comparatively low to reduce future RMD-driven tax burdens. Conversions create current taxable income—coordinate with tax planning and advisor guidance.
- Capital gains: when selling appreciated taxable holdings to rebalance, prioritize lots with long-term gains and use losses to offset gains when available.
- Wash-sale rule: if you sell a stock or ETF at a loss in taxable accounts, avoid repurchasing the same or ‘‘substantially identical’’ security within 30 days.
Authoritative source for tax rules: Consumer Financial Protection Bureau and the IRS provide guidance on tax implications of retirement distributions; consult a CPA for personal tax planning (IRS RMD guidance, ConsumerFinance.gov retirement resources).
Managing Required Minimum Distributions (RMDs)
RMDs begin at age 73 for most account holders as of 2025. RMDs can force withdrawals that change your asset mix if not planned for. Coordinate rebalancing with anticipated RMDs:
- Plan distributions from accounts that best fit your tax strategy (e.g., draw taxable accounts first to let Roths grow tax-free, but ensure you satisfy RMDs from tax-deferred accounts).
- Use RMD projections in your asset-allocation plan to avoid forced sales in down markets.
IRS RMD reference: https://www.irs.gov/retirement-plans/required-minimum-distributions-rmds
Advanced near-retirement rebalancing techniques
- Glidepath or phased allocation: gradually shift to a more conservative strategic allocation over several years instead of an abrupt move the year you retire. This reduces timing risk.
- Bucket strategy: separate assets into short-term (1–3 years), intermediate (3–10 years), and long-term (10+ years) buckets. Fund short-term needs with cash and short-duration bonds; keep growth assets in the long-term bucket.
- Bond-laddering: build a fixed-income ladder that provides predictable cash flows and reduces interest-rate reinvestment risk.
- Partial de-risking: reduce concentrated company stock positions over time with a stepwise plan (see our post on Concentrated Stock Reduction for a practical method).
These techniques help smooth withdrawals and manage volatility while preserving upside for longer retirements.
Practical execution: trades, costs, and timing
- Prefer rebalancing inside tax-advantaged accounts when possible to avoid immediate tax consequences.
- Watch trading costs and bid-ask spreads. Use broad-market index funds or ETFs with low expense ratios to keep costs down.
- Consider in-kind rebalances when moving between brokerages to avoid taxable events in taxable accounts.
- If you sell large positions, stagger sales to manage market impact and tax consequences rather than executing all trades at once.
Common mistakes to avoid
- Waiting until retirement to rebalance. Rebalancing earlier and gradually reduces the chance of a forced, poorly timed shift.
- Overreacting to short-term market moves. Stick to your methodology (calendar, threshold, or cash-flow).
- Ignoring liquidity needs. Maintain a 1–3 year cash buffer to prevent selling risk assets after a market drop.
- Treating all accounts the same. Account type affects taxes and the optimal location for specific asset classes.
Quick checklist before you rebalance
- Confirm retirement date and spending needs.
- Project RMDs and guaranteed income sources.
- Calculate current across-all-account allocation.
- Decide target allocation and chosen rebalancing method.
- Review tax implications and lot selection in taxable accounts.
- Maintain a cash buffer for 12–36 months of expenses.
- Document the plan and review annually or after major life events.
Useful FinHelp resources and further reading
- Read about liquidity-focused work on rebalancing in our piece on Liquidity-Aware Asset Allocation for Near-Retirees.
- For tax-efficient rebalancing strategies in taxable accounts, see Using Tax-Efficient Lots When Rebalancing Taxable Accounts.
- For income-focused allocation after retirement, consider Income-Focused Asset Allocation for Retirees.
Authoritative external references
- Securities and Exchange Commission, Retirement: Know Your Options — https://www.sec.gov/investor/pubs/retirement.htm
- Internal Revenue Service, Required Minimum Distributions (RMDs) — https://www.irs.gov/retirement-plans/required-minimum-distributions-rmds
- Consumer Financial Protection Bureau, Retirement Planning tools and resources — https://www.consumerfinance.gov/consumer-tools/retirement/
Professional disclaimer
This article is educational only and does not replace personalized advice. Tax rules, RMD ages, and individual circumstances vary; consult a certified financial planner and a tax professional (CPA) before making account-level changes.
If you want help converting this plan into a one-page action checklist tailored to your accounts, work with a CFP professional who can run projections and coordinate tax strategies.
