Rebalancing Rules in Retirement

Good Morning Relaxing Retirement Member,

As we illustrated and emphasized last week, after you have strategically allocated your Retirement Bucket™ to capture the returns of a diversified and strategic mix of asset classes while exposing you to an appropriate level of risk and volatility, the next step in The Relaxing Retirement Formula™ is Objective Retirement Bucket™ Rebalancing 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. Successful investors 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 three big areas to focus on:

  1. Lifestyle Cashflow Management: The overriding goal of your Retirement Bucket™ is to provide the rising, inflation-adjusted cash flow you need each year to maintain your desired lifestyle and support your most important goals. Since you’ve already pre-determined your level of Retirement Bucket Dependence each year going forward, each time you are scheduled to rebalance (or reallocate), you want to simultaneously take a look at your cash balances, your short-term income holdings, your anticipated dividends, and your IRA Required Minimum Distribution 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 without the fear of being “caught” having to sell in a down market.

  1. Tax Efficiency Management: 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 three tax lenses to view your holdings through:
    1. Cash flow support: are you generating your needed cash flow in the most tax efficient manner?
    2. Tax loss harvesting: have you evaluated opportunities to strategically realize capital losses (if available) in order to reduce your capital gains and ordinary income taxes?
    3. Asset location strategy: have you positioned the least tax-efficient holdings inside of tax-deferred traditional and rollover IRAs, and the most tax-efficient holdings in non-IRA accounts (if available) in order to take advantage of lower capital gains tax rates and tax free dividend status?
  1. Retirement Bucket Rebalancing: As we discussed last week, in order to ensure a consistent level of risk exposure, consistently evaluate your current vs. your target Retirement Bucket™ allocation to determine if there is a need for strategic and disciplined rebalancing, including your:
    1. Fixed Income (Debt) vs. Equity Investments (see last week’s Strategy)
    2. Fixed Income Investment duration and quality, i.e. short vs. long term, high vs. lower quality bonds
    3. Large vs. Small Cap allocation
    4. Value vs. Growth style exposure
    5. Weighting in companies headquartered in developed and emerging international markets, etc.
    6. Selection: are your choices in each asset class still appropriate?
    7. Allocation: Is there a compelling reason to change your pre-determined investment allocation targets?

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 spending numbers to make sure that your assumptions are in line with your actions.

If you’ve purchased a condominium in Florida or Arizona 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 increased.

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

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)