Once you need to start pulling money out of your retirement accounts to cover your costs of living, your relationship with your investments changes. Because you need to have readily available money to pay your bills, you can no longer be "all-in" on stocks or other volatile investments.
Instead, you have to have a balance between riskier assets to attempt to keep up your purchasing power for your longer-term future and less risky ones to handle those near-term costs. The trade-off, of course, is that the less risky an investment is, the less its potential return generally ends up being.
That need to maintain a balance while actively spending down your portfolio raises a key question: Should you rebalance your retirement portfolio by the end of the year or in 2024? That is an important question to ask, but there are many different factors that go into that decision. As a result, the choice of when to rebalance depends on your personal circumstances. Here are three key factors to consider as you make that choice.
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No. 1: How far away are you from your target?
There are multiple different approaches to asset allocation for a retirement portfolio. The most typical ones involve some target of savings and/or high-quality, fixed-income securities to cover your near-term costs.
If you're considering rebalancing your retirement portfolio, the first thing you should ask yourself is how far away is your actual portfolio from the one you want? If it's close, you may not even need to rebalance your holdings. Instead, you can plan your withdrawals in a way that pulls from the assets that you have a slight overweight position in, bringing you closer to your target with minimum transaction churn.
On the other hand, if you're very far away from your targets, which is possible given the stock market's strong run in 2023, then that argues for a rebalancing sooner rather than later.
No. 2: Where is your retirement portfolio located?
If your money is largely or entirely invested inside of an IRA or other tax-sheltered account, then the timing of your rebalancing doesn't make much of a difference from a tax perspective. What does matter, though, is making sure you take any required minimum distributions that you are subject to by Dec. 31.
Of course, if your money is largely invested in an ordinary brokerage account, then you also have to consider the tax implications of any moves you make. It's never a good idea to let tax considerations dominate your investment decisions, but taxes are still an important factor to keep in mind.
If your rebalancing actions in 2023 would put you over a key threshold that would make your taxes and costs substantially higher, then it might make sense to wait until 2024. Otherwise, feel free to make 2023 the year you take steps to rebalance.
No. 3: What do your tax situation and income-related costs look like?
Speaking of those taxes, while your tax brackets certainly play a role in your total tax situation, there are at least three other thresholds that retirees should keep in mind.
First, your Social Security benefit may be taxed, depending on your "combined income." If you're single, your benefit starts getting taxed at $25,000, while if you're married filing a joint return, it starts getting taxed at $32,000. The amount of your benefit subject to tax increases for singles at a $34,000 combined-income level or $44,000 for those who are married filing jointly. (Those who are married and file separate returns will likely pay taxes on their Social Security benefit at any income level.)
Your combined income from a Social Security perspective is your adjusted gross income, plus your non-taxable interest, plus half of your Social Security benefits.
Second, your Medicare Part B premium depends on your income level from a previous year. For 2024, Medicare will use your 2022 adjusted gross income as reported on the taxes you filed in 2023, and the lookback window will carry forward like that over time.
For single people, higher Medicare premiums for 2024 kick in with an adjusted gross income above $103,000, while for those who are married filing joint returns, they start at $206,000.
Third, there's the net investment income tax. That's an additional 3.8% tax on investment-related income like interest, dividends, and capital gains. It kicks in based on passing an adjusted gross income threshold. For singles, it kicks in above $200,000, for those married filing jointly above $250,000, and for those married filing separate returns above $125,000.
If your rebalancing actions would tip you across a key threshold by doing them now, it may make sense to wait until the new year to take action. Still, recognize that market returns are never guaranteed, so an unrealized gain today may turn into a very real loss tomorrow. So if you think you'd like to delay to 2024 for tax purposes, keep that risk in mind and decide where your comfort level is with that trade-off.
Get started now
Regardless of whether you end up rebalancing before the end of this year or wait until 2024 to make it happen, now is a great time to assess those three key factors and make a plan. By knowing now what you'll do, you keep the option open to rebalance in 2023 if that makes the most sense for you.
If it turns out that waiting is the right answer, then at least you will have done the leg work to know what you want to make happen in the New Year. That just might be one of the nicest gifts you can give yourself this holiday season.
