Rebalancing Your Retirement Portfolio Without Losing Sleep

Why your “set it and forget it” portfolio doesn’t stay put

You can design a 60% stock / 40% bond portfolio on day one. The market will ignore that from day two.

Stocks grow faster than bonds over long periods. That’s great when you’re building wealth, but it also means your risk quietly creeps up. A 60/40 mix that hasn’t been touched in a decade after a strong bull market can easily morph into 75/25 or more.

That’s not just a cosmetic issue. It changes:

• How much your portfolio can drop in a bad year
• How long it might take to recover
• Whether your withdrawal plan in retirement still makes sense

So rebalancing is basically you saying: “No, portfolio, you don’t get to decide my risk level. I do.”

How does rebalancing actually work in practice?

Let’s keep it simple. You start with a target mix. Say:

• 60% stocks (broad index funds, maybe some international)
• 40% bonds (Treasuries, investment-grade bond funds)

After a strong stock market year, you check your account and see:

• 70% stocks
• 30% bonds

You haven’t changed your mind about risk. So you sell some stocks and buy some bonds until you’re back near 60/40. That’s it. No need to overcomplicate it.

Where people get stuck is not the concept but the rules: how often, how far off target, and what to touch first.

Do you rebalance by the calendar or by “drift”?

There are two dominant approaches, and honestly, both can work.

Time-based: “I rebalance once a year and move on”

Some investors pick a date—New Year’s, birthday, tax time—and rebalance once a year. That’s it. Check allocations, make a few trades, close the laptop.

This works well for people who:

• Don’t want to think about the market every month
• Prefer a simple, repeatable routine
• Have long time horizons

Take Erin, 38, contributing regularly to her 401(k). She set a 90/10 stock/bond mix and decided she’d rebalance every January. Some years she barely needs to touch it. Other years, after big stock gains, she trims her equity funds and adds to bonds. Because she’s young and still adding new money, small drifts don’t bother her.

Is this perfect? No. But it’s predictable and “good enough,” which is often what actually gets done.

Threshold-based: “I only rebalance when the drift gets too big”

Others prefer a trigger approach: you only rebalance when an asset class strays beyond a set band. For example:

• Target: 60% stocks
• Band: ±5%
• Action: If stocks go below 55% or above 65%, you rebalance

This method is a bit more surgical. You’re not trading just because the calendar flipped. You’re reacting only when risk meaningfully changes.

Now picture Daniel, 59, hoping to retire at 65. His target is a 60/40 mix. He sets bands of ±5%. In a strong bull market, his stocks creep up to 68%. That’s outside his band, so he trims equities back toward 60%. In a rough year, stocks fall to 53%; he shifts some money from bonds back into stocks to stay on plan.

Is he timing the market? Not really. He’s just enforcing his risk bands.

Why rebalancing matters more as you approach retirement

When you’re 30, a 30% drawdown is painful but survivable. You have decades of paychecks ahead of you. When you’re 63 with retirement penciled in for age 66, that same drawdown can wreck your timeline.

This is where rebalancing stops being an academic idea and becomes a real-life risk control tool.

Think about three stages:

• Accumulation (20s–40s): You’re adding money. Rebalancing can mostly happen through how you direct new contributions.
• Pre-retirement (50s–early 60s): You’re protecting the nest egg. Large drifts can be dangerous.
• Withdrawal phase (mid-60s+): You’re taking money out. Rebalancing decisions now directly affect your spending safety.

In the last two stages, ignoring rebalancing is basically saying, “I’m okay with my risk level being random.” That’s a tough stance when your paycheck is about to stop.

Using new contributions and withdrawals as your first lever

Before you start selling anything, there’s a quieter way to rebalance: point new money (or withdrawals) at the “wrong” side of your portfolio.

• If stocks have run hot and you’re overweight in equities, direct new contributions to bonds or cash-like holdings.
• If bonds have outperformed and you’re underweight stocks, send new money to equities.

In retirement, the logic flips slightly:

• If stocks are overweight, take more of your withdrawals from stock funds.
• If stocks are underweight after a bad year, lean more on bonds and cash buckets for income.

Take Maria, 67, recently retired with a $1.2 million portfolio and a 50/50 target. After a big equity rally, she’s sitting at 60/40. Instead of immediately selling stock funds, she spends the next 12 months taking her monthly withdrawals entirely from her stock holdings. By the end of the year, she’s much closer to 50/50 without any extra trading.

This approach tends to be tax-friendlier in taxable accounts and psychologically easier. You’re not “selling winners” so much as “spending from the side that’s already ahead.”

How often is “too often” to rebalance?

There’s a temptation—especially among detail-oriented investors—to start treating rebalancing like a hobby. That usually backfires.

If you’re rebalancing every week or every time the market moves 2%, you’re:

• Generating unnecessary trading costs (even with low commissions, there are spreads and potential taxes)
• Constantly second-guessing your plan
• Turning long-term investing into short-term noise management

Most research points to something like this being reasonable:

• Check allocations a few times per year
• Act when you’re outside your chosen bands (say 5% or 10%)
• Avoid micro-adjustments for small moves

If you’re using a target-date retirement fund or a managed account, a lot of this is automated anyway. The key is understanding that it’s happening, not trying to override it every month because you read a scary headline.

What about taxes when you rebalance in taxable accounts?

Inside tax-advantaged accounts (401(k), IRA, Roth IRA), you can generally rebalance without worrying about capital gains. Outside those, it’s a different story.

In a taxable brokerage account, selling appreciated assets can trigger capital gains taxes. That doesn’t mean you never rebalance; it means you’re more deliberate.

Common ways to soften the tax hit:

• Favor rebalancing inside tax-advantaged accounts first
• Use new contributions and dividends to buy underweight assets
• Consider tax-loss harvesting when markets are down (selling losers to offset gains)
• Prioritize selling positions with higher cost basis when trimming

The IRS has a good overview of capital gains rules and rates here: https://www.irs.gov/taxtopics/tc409

If you’re nearing retirement and sitting on large unrealized gains, it’s worth modeling whether gradual, planned rebalancing over several years beats waiting and then being forced to sell in a bad market.

How rebalancing interacts with your withdrawal strategy

Rebalancing doesn’t live in a vacuum once you start drawing income. It intertwines with:

• Your withdrawal rate (4% rule, guardrails, or some custom plan)
• Required minimum distributions (RMDs)
• How much cash you keep on the sidelines

Imagine a retiree, James, 72, with a $1 million portfolio and a 50/50 target. He needs to take RMDs from his traditional IRA. This year, stocks had a strong run and his allocation is 58% stocks, 42% bonds.

Instead of taking his RMD proportionally from all holdings, he and his advisor decide to:

• Take the full RMD from stock funds inside the IRA
• Direct some of that into a short-term bond or cash fund for next year’s spending

Result: he satisfies the RMD, trims his overweight equities, and reinforces his short-term spending bucket. One decision, three jobs done.

For a broader look at retirement income planning, resources like the Consumer Financial Protection Bureau offer straightforward guides.

Should your rebalancing strategy change as you age?

Short answer: usually, yes.

When you’re younger, you can:

• Tolerate larger drifts
• Use contributions as your main rebalancing tool
• Focus more on staying invested than on precision

As you age, your approach tends to tighten up:

• Narrower bands (for example, ±5% instead of ±10%)
• More attention to sequence-of-returns risk (bad markets early in retirement)
• Closer coordination with your income plan and RMDs

Some retirees also adopt a “bucket” approach—keeping a few years of cash or ultra-short bonds for spending, a medium-term bond bucket, and a long-term growth bucket. Rebalancing then happens both within and between those buckets.

If you want to dig into retirement portfolio research, the Center for Retirement Research at Boston College publishes accessible papers on withdrawal and asset allocation topics.

Two real-world-style scenarios: how this plays out

Let’s walk through two investors with very different situations.

The late-50s pre-retiree with a drifting 401(k)

Alex, 58, has a $900,000 401(k). Ten years ago, a target of 70% stocks / 30% bonds felt right. He hasn’t really touched it since, other than contributing. After a decade of mostly strong markets, he finally checks the allocation report.

Surprise: he’s sitting at roughly 82% stocks, 18% bonds.

He wants to retire at 65. That 82% equity exposure is not what he had in mind.

Instead of panicking and dumping stocks all at once, he and his plan’s advisor map out a three-year glide path:

• Year 1: Shift new contributions and employer match entirely into bond and stable value funds, plus a modest one-time rebalance to bring stocks down to about 75%.
• Year 2: Repeat the process, aiming for around 68–70% stocks.
• Year 3: Another adjustment toward a 60/40 mix as retirement nears.

This is rebalancing as course correction, not as a one-day event. He’s still in the market, still benefiting from growth, but he’s no longer letting old allocations dictate his risk.

The 70-something retiree managing volatility

Linda, 74, has a $1.5 million portfolio split between an IRA and a taxable account. Her target is 50% stocks, 50% bonds and cash. She takes about 3.5% per year in withdrawals.

After a couple of strong years, her portfolio drifts to 60% stocks. She’s happy with the growth, but the volatility is starting to make her nervous.

Instead of a big, immediate rebalance, she:

• Takes her annual withdrawals entirely from stock funds in the IRA
• Directs dividends and interest in the taxable account into a money market fund
• Sells a small slice of an overweight U.S. stock fund in the IRA to top up bonds

Over 12–18 months, she’s back near 50/50. She never had to sell stocks in the taxable account (avoiding extra capital gains), and psychologically, the changes felt incremental rather than drastic.

What if you just…never rebalance?

It’s worth asking the uncomfortable question: what happens if you simply let things ride for 30 years?

Historically, a stock-heavy portfolio that drifts even more toward equities often ends up with a higher terminal value—but at the cost of much higher volatility and deeper drawdowns along the way. That might sound fine at 35 and feel terrifying at 65.

The real risk isn’t just “more ups and downs.” It’s that:

• You might be forced to sell in a downturn to meet spending needs
• You might abandon your plan at the worst possible moment

Rebalancing is basically a discipline system that helps you avoid those emotional, badly timed decisions.

For a more technical exploration of asset allocation and risk, the SEC’s investor education site is a solid starting point.

FAQ: Rebalancing your retirement portfolio

How often should I rebalance my retirement portfolio?

Many investors do well checking allocations once or twice a year and rebalancing only when they’re meaningfully off target (for example, more than 5 percentage points away from the target for a major asset class). Constant tinkering rarely adds value and can increase costs and stress.

Is rebalancing market timing in disguise?

Not really, if you’re doing it based on a pre-set plan. Market timing is guessing where prices go next. Rebalancing is about enforcing your chosen risk level, regardless of your opinion about short-term moves. You’re not predicting; you’re maintaining.

Should I rebalance during a market crash or wait?

If you have a written plan (bands, schedule), sticking to it usually beats improvising. In a sharp downturn, rebalancing often means buying more stocks when they’re cheaper, which is emotionally hard but mathematically consistent with your long-term strategy. That said, if the crash has genuinely changed your risk tolerance or retirement timeline, it may be time to revisit the target allocation itself, not just rebalance.

Can I just use a target-date fund and forget about rebalancing?

Target-date funds automatically adjust allocations and rebalance for you based on a target retirement year. For many investors, especially inside 401(k)s, they’re a reasonable “one-decision” solution. The catch is that you still need to make sure the target date and risk profile actually fit your situation, and you should avoid mixing several different target-date funds together.

Does rebalancing always improve returns?

No. In some market environments, a portfolio that never rebalances can end up with higher returns simply because it becomes more stock-heavy. The trade-off is higher risk and larger drawdowns. Rebalancing is less about squeezing out maximum return and more about keeping risk at a level that lets you stay invested and stick to your retirement plan.

Rebalancing isn’t glamorous. It’s the financial equivalent of regular maintenance—changing the oil, checking the tires, making sure nothing’s rattling loose. But that quiet, periodic discipline is often what keeps a retirement plan intact when markets get loud.