Rebalancing Guidelines

Last week, we introduced Principle and Guideline #4 which is, once you have your investment system in place and your allocation correct, you must objectively evaluate and rebalance your investments (if necessary) on a pre-determined timeframe.

In other words, you can’t leave it up to a whim.  Top 6% retirees schedule their dates and “objectively” hold themselves accountable.

The next question is what criteria and guidelines should we use when rebalancing?

The answer to that has many answers, but here are some of those that we use:

  1. Upcoming Cash Flow Needs: the whole purpose of investing in retirement is to provide continuous, inflation adjusted cash flow to support your lifestyle.  As such, since you’ve already pre-determined your ‘dependency’ on your Retirement Bucket™ each year going forward, each time you are scheduled to rebalance (or reallocate), you want to 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 with all your other money.
  2. Tax Strategies: Assuming for a moment that you 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?
    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?
    4. Are there any gains or losses we can “harvest”?
  3. Allocation: Is our exposure to our pre-determined asset classes still where we want them 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 allocation
    4. Value vs. Growth exposure
    5. Percentage of allocation in foreign and emerging markets, etc.
    6. Is there a compelling reason to change our pre-determined investment mix?
  4. Performance: Objectively hold all managers accountable in each category by studying their performance, 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 Equation™ 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 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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