Rebalancing

Rebalancing is the process of realigning the mix of investments in a retirement portfolio back to its original or target allocation. Over time, some investments grow faster than others, which causes the portfolio to drift away from its intended balance. Rebalancing brings everything back in line by selling portions of investments that have grown too large and buying more of those that have shrunk in proportion.

For example, suppose a retirement investor starts with a portfolio that is 60% stocks and 40% bonds. After a strong year in the stock market, that mix might shift to 75% stocks and 25% bonds. The portfolio now carries more risk than originally intended. Rebalancing would involve selling some stocks and purchasing more bonds to return to the 60/40 target.

There are a few common approaches to rebalancing:

• Calendar rebalancing: Reviewing and adjusting the portfolio on a set schedule, such as once a year or every six months.
• Threshold rebalancing: Making adjustments only when an asset class drifts beyond a set percentage from the target, such as 5% or more.
• Combination approach: Checking the portfolio on a regular schedule but only rebalancing if the allocation has drifted past a certain threshold.

Rebalancing inside tax-advantaged accounts like a 401(k) or IRA can be simpler from a tax perspective, since buying and selling within those accounts does not trigger capital gains taxes in the year of the transaction. Rebalancing in a taxable brokerage account may have tax implications worth reviewing with a qualified tax professional.

In 2026, contribution limits for 401(k) plans are $23,500, with a catch-up contribution of $7,500 for those aged 50 and older. A special higher catch-up limit of $11,250 applies for those aged 60 to 63. Keeping contributions flowing into the right asset classes as part of regular investing can sometimes reduce how often full rebalancing is needed.

Rebalancing helps manage risk over time and keeps a retirement strategy aligned with personal goals and timelines. The right frequency and method will depend on individual circumstances, account types, and market conditions. RetireGrader is not a financial advisor or fiduciary.