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I KISSED REBALANCING goodbye. In any case, I wasn’t consistent about rebalancing our retirement portfolio.
I’ve never attempted to maintain a specific stock-bond ratio. Whenever I did something akin to rebalancing, it was usually in response to some vague discomfort about the level of risk we were taking. Or it was based on a hunch about where the market would move in the near future—typically misguided.
This latter activity is also known as market timing. While periodic, methodical rebalancing is generally seen as virtuous by most financial experts I respect, trying to time the market is considered a no-no by just about all of them.
Somewhere along the line, I read that the best-performing financial accounts were those that had been forgotten. Turns out, the study used as the basis for that story might be apocryphal. Still, it seems clear that excessive trading and tinkering tend to be negative for returns. That’s certainly been my experience.
My current philosophy for my 401(k) and our two Roth IRA accounts—mine and my wife’s—is to just let them be. I don’t expect to be taking withdrawals for at least another decade, and hopefully even longer. In the case of the Roth IRAs, the most likely scenario is that they’ll pass intact to our children. Given the long horizon for these accounts, it makes sense to favor stocks. Why rebalance and perhaps undercut the growth potential?
Up until last year, I’d expected to be pulling money out of my old employer’s 401(k) plan, along with a rollover IRA that would be funded with my cash balance pension, to pay for retirement. In the years leading up to my recent retirement, I’d gradually made my overall portfolio a bit more conservative in an attempt to reduce the sequence-of-return risk that’s a big threat early in retirement.
But my plans changed. Increased interest rates in 2023 made selecting my pension’s monthly payment option more attractive. Rather than taking my pension as a lump sum, as I’d always planned, I traded in the entire cash payout for the annuity option. Although this decision drastically reduced my net worth, I no longer need to think about tapping our retirement accounts to live on.
Realizing I’d probably be taking the pension as an annuity, I reversed course last year and replenished our retirement accounts’ stock holdings a bit. Our combined retirement portfolio is now 57% in stocks. The Roth IRAs have a considerably higher stock allocation than the 401(k). I’m pretty satisfied with the mix of low-cost index funds we hold.
I suppose I could increase the stock holdings faster by transferring even more over from the bond funds, but I don’t plan to. I like being insulated from the emotional impact of short-term stock market drops, knowing that a decent portion of the portfolio won’t be affected. Absent a prolonged, severe disruption to the world economy, 10 or 15 years from now our portfolio’s stock weighting might be up to 75% and perhaps more. In that case, the portfolio should have grown enough that, even if the market experienced a temporary large downturn, there’d be no need for alarm.
Tinkering with our portfolio is a tempting retirement hobby. I have more free time and the spreadsheets are already built. Still, I’ve learned not to trust myself. In hindsight, my previous “clever” moves usually turned out not to be. Even though it might be fun to play around with the fund choices and allocations, I know the chances are good that I’d make things worse rather than better.
My current thinking is that, now I have our fund mix adjusted to my satisfaction, the portfolio can essentially run on autopilot for many years. I did manage to mostly leave my 401(k) account alone from 2017 to 2021, with favorable results: The balance ballooned 75%, powered by my S&P 500 index fund’s performance. Here’s hoping I have the discipline to continue doing nothing.
Ken Cutler lives in Lancaster, Pennsylvania, and has worked as an electrical engineer in the nuclear power industry for more than 38 years. There, he has become an informal financial advisor for many of his coworkers. Ken is involved in his church, enjoys traveling and hiking with his wife Lisa, is a shortwave radio hobbyist, and has a soft spot for cats and dogs. Follow Ken on X @Nuke_Ken and check out his earlier articles.
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“I did manage to mostly leave my 401(k) account alone from 2017 to 2021, with favorable results: The balance ballooned 75%, powered by my S&P 500 index fund’s performance”
Since trades in IRA and 401(k) accounts do not cause capital gains I long ago made my Roth 100% stock and hold a mix of stock & bonds in my 401(k). My thinking was that since the Roth is untaxed for withdrawal or inheritance and since stocks have a higher expected return they should be placed in the Roth. The downside is that should I want to take money from bonds in my retirement accounts the withdrawal from the 401(k) will be taxed as ordinary income.
Look on the bright side: If you’d held the bonds in your retirement account, the interest earned there would also have been taxed as ordinary income — and the tax bill would have come due every year, rather than being deferred, as it is in an IRA.
I agree with you. I don’t rebalance on a regular basis. When I retired, I was 100% in equities but reduced that for some stability. I put my fixed income in my rollover IRA and all equities in my taxable Vanguard account. My taxable account is a little more than twice the size of my IRA and I don’t worry about the mix, which is about 65/35 equity/fixed. I sold all my bonds before they went down big the past few years and all the fixed is in VG’s federal MM fund earning over 5% for the time being. When the interest rate market changes, so will the mix in the IRA. I don’t have a pension but our SS and dividends from the brokerage account are more than we need to live on, and my first time RMD this year will be excess that goes into the brokerage account into equities. It would be nice to have a pension, but most do not get them nowadays. Fortunately I do not need it.
I’m with you Ken. If you have the pension and SS to live on, let it ride. If the S&P goes south fast, we got bigger problems to worry about. I’m long on America and our stock market. Your way is just easier, too!
Well done you!
Always uncertainty in timing annuities. Now seems to be a reasonable moment though I’m also liking my 5%-plus interest on some holdings.
Since I had several jobs over the years I ended up with several distinct accounts and have the opportunity to convert them over time. I use a formula in one of my spreadsheets that calculates the “value” of a particular annuity as if it were a piece of cash instead of a stream of promised payments. That helps with the “bite” of reduced total “wealth” whenever I convert.
Like you, with the amount I’m now getting in periodic payments, I’ve readjusted my perception of what’s my preferred stock allocation.
I still consider rebalancing once a year, but since my tolerance for stocks has risen, I’m comfortable not shifting more into bonds, so overall trading less.
I decided I’m ok with “writing off” the potential cash value the pension had. I could use an annuity calculator and keep tracking its value that way, but now think why bother….
I would assume that people smarter than me have figured out a way to calculate what value in bonds the annuity payments represents and then you could put that potential value in the your bond bucket. If this is true I would like someone to post an article on how to calculate this.
Check out this article:
https://humbledollar.com/2017/09/a-price-on-your-head/
If you use one of the immediate annuity sites, you can find out what it would cost to buy the income stream you’re receiving and then add that to your net worth.
https://humbledollar.com/money-guide/immediate-fixed-annuities/
Thanks Jonathan 😊
Taking that annuity pension was a good move you will never regret, but I wouldn’t think of it as reducing your net worth.
If it makes you feel better Ken, take the annual annuity payment, divide it by 4% and pretend that’s part of your net worth.
Dick, I’m already reaping psychological benefits from that choice, even though my benefit would be higher had I chosen to stick with the old annuity formula all those years ago. I used to distinguish between ‘net worth’ and ‘total assets’ in my spreadsheets, TA being NW + pension cash value. I just don’t bother trying to track TA any more.
For most 100% Roth IRA in VTI. Yes SORR is a retirees greatest risk
One of my favorite Jack Bogle lines, “Don’t do something, stand there!” – here’s to using his wonderful investment vehicle and letting it merrily roll along! 😎
Kevin,
Sorry I can only give you 1 upvote.
That was exactly the quote I thought of while reading Ken’s post!
I lack the ability, knowledge, and even desire to follow the ‘markets’ on a day-to-day basis.
So we do precisely what you do.