Criteria for Rebalancing

As we laid out in Principle and Guideline #4 last week, once you have your investment system in place and your allocation correct, you must objectively evaluate and rebalance your investments (if needed) on a pre-determined timeframe.

In other words, you can’t leave it up to a whim, or how you feel on a given day. Relaxing Retirees schedule their dates and hold themselves objectively accountable.

Given this, the next question is what criteria and guidelines should we use when rebalancing?

There are several issues to consider. Here are some that I recommend for you:

  1. Upcoming Cash Flow Needs: the whole purpose of investing in retirement is to provide continuous lifestyle sustaining cash flow. Since you’ve already pre-determined your level ofdependency’ on your Retirement Bucket™ each year going forward, each time you are scheduled to rebalance (or reallocate), you want to simulaneously take a look at your cash and short term income investments and make sure you have enough liquidity to support your upcoming withdrawal needs. If not, something needs to be freed up. What this allows you to do is continue to invest confidently in inflation fighting investments with all your other money.

  2. Tax Strategies: Assuming for a moment that you already have a withdrawal “strategy” in place in order to potentially reduce your income tax burden as much as possible, here are some questions to continuously ask yourself:

    1. Are our investments properly positioned to take advantage of lower capital gains tax rates vs. ordinary income tax rates? For example, should I own this particular investment inside or outside of my IRA?

    2. Are our investments allocated to reduce income taxes as much as possible and still provide us the income we need?

    3. Are we following our game plan to reduce our required minimum distribution at age 70 ½ and beyond?

  3. Allocation: Is our exposure to our pre-determined asset classes still where we want it to be given market performance?

    1. Fixed Income (Debt) vs. Equity Investments (see last week’s Strategy)

    2. Fixed Income Investment duration and quality

    3. Large Cap vs. Small and Mid Cap stock allocation

    4. Value vs. Growth style exposure

    5. Weighting in foreign developed and emerging markets, etc.

    6. Is there a compelling reason to change our pre-determined investment allocation targets?

  4. Performance: If you are using actively managed funds (vs. passive) for some or all of your investments, then objectively hold all managers accountable in each asset category. Study and evaluate their short and long term performance, risk, volatility, tax efficiency (non-IRA accounts), expenses, etc. vs. their peer groups. Again, the key is objectivity. Don’t fall in love with a fund, a fund family, a manager, etc.

All of these presuppose that you have followed each step in The Relaxing Retirement Formula™ which we’ve outlined in depth over the last few weeks.

If you’ve done so, the last idea I’d like to leave you with is that times change and you must be ready to change if necessary.

However, do so only after careful objective analysis… not just because you ‘feel’ like you should, or because you read that somebody else is changing.

An example of this is continuously checking your numbers to make sure that your assumptions are in line with your actions.

If you’ve purchased a condominium in Florida over the last year which required a significant dip into your Retirement Bucket™ and an increase in ongoing monthly expenses, it’s quite possible that the investment rate of return you now need to earn in order to make things work for you has gone up.

Your allocation must reflect this increased need and be addressed immediately so that you can remain confident.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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