How to Rebalance Your Portfolio as You Approach Retirement

12 May 2025

Retirement is a significant milestone, and your investment portfolio should evolve as you get closer to it. If you’re in your 50s or early 60s, you may have realized that the aggressive approach that worked in your 30s and 40s is no longer ideal. That’s where portfolio rebalancing comes in.

Think of it like adjusting the sails on a boat. If you don’t rebalance, your financial ship could be headed straight into stormy waters. So, how do you realign your investments to ensure a smooth retirement journey? Let’s break it all down.

What Does Rebalancing a Portfolio Mean?

At its core, rebalancing means adjusting the mix of your investments to keep them in line with your financial goals and risk tolerance. Over time, market fluctuations can push your portfolio out of balance. For example, suppose you initially aimed for a 60% stock and 40% bond allocation, but due to strong stock performance, you now have 75% in stocks. That shift increases your risk exposure, which might not be ideal as retirement approaches.

Rebalancing brings your portfolio back to a risk level you're comfortable with by selling some assets and buying others. It’s all about maintaining financial stability while still allowing for steady growth.

Why Is Portfolio Rebalancing Crucial Before Retirement?

As you near retirement, your investment priorities shift. During your working years, you might have taken on more risk, knowing you had time to recover from any market downturns. But once retirement is within sight, the focus should shift toward capital preservation and reliable income.

Here’s why rebalancing is crucial:

- Reduces Risk: As you age, the last thing you want is a major market crash wiping out years of savings.
- Ensures Steady Income: Allocating more to income-generating assets like bonds, dividend stocks, or annuities can provide a reliable cash flow.
- Maintains Long-Term Growth: While you need stability, growth is still essential to ensure your money lasts throughout retirement.

When Should You Rebalance Your Portfolio?

There’s no one-size-fits-all answer, but there are a few key moments when rebalancing makes sense:

- Annually or Semi-Annually: A regular checkup ensures your portfolio stays in line with your retirement goals.
- Market Swings: If one asset class dramatically outperforms the others, it might be time to realign.
- Major Life Events: Retirement, inheritance, or a major health change can all impact your financial needs.

Many financial advisors recommend setting a rebalancing threshold—typically around 5% to 10%. If your target allocation drifts beyond that range, it’s time for an adjustment.

Step-by-Step Guide to Rebalancing Your Portfolio

Rebalancing doesn’t have to be complicated. Here’s a structured approach to get you started:

1. Assess Your Current Portfolio Allocation

Begin by reviewing your investment accounts, including 401(k)s, IRAs, and taxable brokerage accounts. Compare your current portfolio allocation to your target allocation. If there’s a significant drift, an adjustment is necessary.

2. Recalculate Your Risk Tolerance

Your risk tolerance when you were 40 is probably different from what it is now. As you approach retirement, you’ll likely want a more conservative portfolio to protect your nest egg. A common strategy is the "60/40 Rule", where 60% of your portfolio is in stocks and 40% in bonds. However, you may want to adjust that based on your comfort level.

3. Adjust Your Stock-to-Bond Ratio

The conventional wisdom is to gradually shift from stocks to bonds as you near retirement. Here are a few popular asset allocation strategies:

- 70% Stocks / 30% Bonds: Suitable for those who still want considerable growth.
- 60% Stocks / 40% Bonds: A balanced approach, offering growth while reducing risk.
- 50% Stocks / 50% Bonds: More conservative, with a focus on stability.
- 40% Stocks / 60% Bonds (or even lower): Ideal for those prioritizing capital preservation.

4. Diversify Your Investments

Even within asset classes, diversification is key. Instead of holding just one type of stock or bond, spread your investments across multiple sectors and geographic regions. Consider:

- Dividend-paying stocks for reliable income.
- Short-term and intermediate bonds to reduce interest rate risk.
- REITs (Real Estate Investment Trusts) for exposure to real estate without direct ownership.
- Alternative investments like gold, commodities, or annuities for additional stability.

5. Minimize Taxes When Rebalancing

Selling assets to rebalance can trigger capital gains taxes. To minimize the tax burden:

- Prioritize rebalancing within tax-advantaged accounts (IRAs, 401(k)s).
- Use new contributions to buy underweight assets instead of selling off winners.
- Consider tax-loss harvesting strategies to offset taxable gains.

6. Automate the Rebalancing Process

If manually rebalancing feels overwhelming, automation can help. Many brokerages and robo-advisors offer automatic rebalancing tools to keep your portfolio in check without the hassle.

7. Review and Adjust Regularly

Your financial needs will continue to change even after you retire. Schedule periodic reviews every six months or annually to ensure your investment strategy aligns with your evolving retirement goals.

Common Mistakes to Avoid When Rebalancing

While rebalancing is essential, there are mistakes you’ll want to sidestep:

1. Overreacting to Market Swings – Avoid making drastic changes after every market dip. Stick to your long-term plan.
2. Ignoring Fees and Taxes – Selling assets too frequently can lead to unnecessary taxes and fees.
3. Taking on Too Little Risk – While a conservative approach is smart, don’t eliminate growth opportunities completely.
4. Not Considering Inflation – A portfolio too heavy in low-yield assets can fail to keep up with inflation, eroding your purchasing power over time.

Final Thoughts

Rebalancing your portfolio as you approach retirement isn’t just a one-time task—it’s an ongoing process. By adjusting your asset allocation, diversifying strategically, and minimizing tax impacts, you can create a portfolio that provides both stability and income during your golden years.

Think of it like tuning an instrument. Without regular adjustments, things can get out of sync. But with careful, periodic fine-tuning, you can ensure a harmonious financial future—one that allows you to enjoy retirement without stress.

So, when was the last time you rebalanced your portfolio? If it’s been a while, now may be the perfect time!