Even if you divide your retirement savings among stocks, bonds, and cash, the original allocation will not remain unchanged. Because each asset produces a different return and you withdraw money for living expenses, the allocation changes over time.<\/p>\n\n\n\n
When the stock market rises sharply, stocks may account for a larger share of your total assets than originally planned. Conversely, if stock prices fall or you continue withdrawing cash, the proportion of a particular asset may become too low.<\/p>\n\n\n\n
the retirement bucket strategy<\/a>, you can divide your funds into living-expense, safety, and growth buckets, but the allocation of each asset can still change over time.<\/p>\n\n\n\n The process of readjusting these changed asset allocations to their target percentages is called rebalancing.<\/p>\n\n\n\n The purpose of rebalancing is not to increase short-term returns or predict market rises and declines. Its main purpose is to prevent your portfolio from moving too far away from the level of risk you originally planned.<\/p>\n\n\n\n Rebalancing is the process of adjusting the proportions of stocks, bonds, cash, and other assets that have changed because of market movements so that they match your predetermined target asset allocation.<\/p>\n\n\n\n Suppose you originally allocated 60% of your retirement savings to stocks, 30% to bonds, and 10% to cash. If the stock allocation later rises to 70%, your portfolio will be more heavily affected by stock market movements than you originally planned.<\/p>\n\n\n\n Conversely, if the stock allocation falls substantially and the cash allocation becomes too high, short-term price fluctuations may decrease, but the portfolio\u2019s long-term growth potential and ability to keep pace with inflation may also decline.<\/p>\n\n\n\n Rebalancing does not mean automatically selling assets that have performed well or buying assets that have produced lower returns. You must first determine whether your current asset allocation is still appropriate for your living expenses, investment horizon, financial goals, and risk tolerance.<\/p>\n\n\n\n Rebalancing means returning your portfolio to its existing target allocation.<\/p>\n\n\n\n Changing your asset allocation, however, means establishing new target percentages because your retirement date, health, living expenses, regular income, investment horizon, or risk tolerance has changed.<\/p>\n\n\n\n For example, if your target of 60% stocks, 30% bonds, and 10% cash is still appropriate but a market rise has increased the stock allocation to 70%, returning to the existing target is rebalancing.<\/p>\n\n\n\n However, if your living expenses increase substantially after retirement or you can no longer tolerate the same level of risk and therefore change the target to 50% stocks, 35% bonds, and 15% cash, this is a change in asset allocation rather than simple rebalancing.<\/p>\n\n\n\n Continuing to return to an outdated allocation may not be appropriate if that target no longer matches your current circumstances.<\/p>\n\n\n\n Stocks, bonds, and cash-equivalent assets do not move in the same way at the same time.<\/p>\n\n\n\n If stocks rise sharply while bonds remain nearly unchanged, stocks will account for a larger portion of your total assets even if you do not make any additional trades.<\/p>\n\n\n\n If you continue withdrawing living expenses from cash or bonds after retirement, the proportion of those assets may decline while the relative proportion of stocks increases.<\/p>\n\n\n\n Conversely, if you sell stocks to cover living expenses, the allocation to growth assets may decrease rapidly.<\/p>\n\n\n\n When bond interest and stock dividends accumulate as cash in your account, your cash allocation may increase even if you make no separate investment decisions.<\/p>\n\n\n\n When deposits or bonds mature, or when you sell a particular investment, the proceeds become cash and change your overall asset allocation.<\/p>\n\n\n\n If you view retirement accounts, taxable investment accounts, deposits, and cash separately, you may misjudge the actual allocation of your total assets.<\/p>\n\n\n\n Although the stock allocation may appear low in one account, combining it with stock-based investments held in other accounts may reveal that the overall portfolio is excessively concentrated in stocks.<\/p>\n\n\n\n If your stock allocation rises above its target, your total retirement savings may suffer a larger loss when the market declines.<\/p>\n\n\n\n Especially early in retirement, one major concern is\u2014 sequence of returns risk<\/a> . When a market decline and living-expense withdrawals occur at the same time, it can become much harder for the portfolio to recover.<\/p>\n\n\n\n If your cash allocation becomes substantially higher than its target, short-term stability may increase, but the purchasing power of your living expenses may decline over time if the portfolio fails to keep pace with inflation.<\/p>\n\n\n\n If your portfolio becomes concentrated in one type of asset, such as bonds or ETFs focused on a particular industry, the actual risk may be concentrated in one area even though you appear to own several different investments.<\/p>\n\n\n\n Rebalancing does not completely eliminate these risks. It is a management process for identifying allocations that have moved away from their targets and readjusting the portfolio\u2019s risk level.<\/p>\n\n\n\n The following is a simplified example designed to explain how rebalancing works.<\/p>\n\n\n\n \u2022 Total retirement savings: KRW 100 million<\/p>\n\n\n\n \u2022 Target stock allocation: 60%<\/p>\n\n\n\n \u2022 Target bond allocation: 30%<\/p>\n\n\n\n \u2022 Target cash allocation: 10%<\/p>\n\n\n\n Initially, the portfolio consists of KRW 60 million in stocks, KRW 30 million in bonds, and KRW 10 million in cash.<\/p>\n\n\n\n Suppose that after a certain period, the value of the stocks has increased to KRW 72 million, while the portfolio holds KRW 28 million in bonds and KRW 10 million in cash.<\/p>\n\n\n\n The total portfolio is now worth KRW 110 million, with the following allocations:<\/p>\n\n\n\n \u2022 Stocks: approximately 65.5%<\/p>\n\n\n\n \u2022 Bonds: approximately 25.5%<\/p>\n\n\n\n \u2022 Cash: approximately 9.1%<\/p>\n\n\n\n To realign the KRW 110 million portfolio with the original target of 60% stocks, 30% bonds, and 10% cash, the target amounts would be:<\/p>\n\n\n\n \u2022 Stocks: KRW 66 million<\/p>\n\n\n\n \u2022 Bonds: KRW 33 million<\/p>\n\n\n\n \u2022 Cash: KRW 11 million<\/p>\n\n\n\n To return to the original target, you could reduce stocks by KRW 6 million, increase bonds by KRW 5 million, and increase cash by KRW 1 million.<\/p>\n\n\n\n This calculation is only an example intended to explain the principle of rebalancing. It excludes taxes, trading fees, the tradability of individual investments, and fluctuations in market prices.<\/p>\n\n\n\n It also does not mean that an allocation of 60% stocks, 30% bonds, and 10% cash is suitable for every retiree.<\/p>\n\n\n\n Before you can begin rebalancing, you must have a clearly defined target asset allocation.<\/p>\n\n\n\n If you have not decided what percentage to maintain in stocks, bonds, cash, and other assets, you have no standard for determining whether the current allocation is appropriate.<\/p>\n\n\n\n Your target allocation should not be determined by age alone. You must also consider your retirement horizon, pension income, living expenses, health, existing assets, investment experience, and ability to tolerate losses.<\/p>\n\n\n\n If the target allocation no longer matches your current financial circumstances, you should review the asset allocation itself before rebalancing.<\/p>\n\n\n\n Review your retirement accounts, taxable investment accounts, deposits, cash, and other financial assets together.<\/p>\n\n\n\n The same stocks or industries may be duplicated across several ETFs and funds, so you should examine the underlying holdings rather than looking only at investment names.<\/p>\n\n\n\n If you rebalance each account separately without combining all your assets, it may be difficult to align the risk level of the overall portfolio accurately.<\/p>\n\n\n\n You can calculate the current allocation of each asset by dividing its current value by the value of your total investment assets.<\/p>\n\n\n\n Current asset allocation = Current value of the asset \u00f7 Total investment assets \u00d7 100<\/p>\n\n\n\n If your target stock allocation is 60% and the current stock allocation is 65%, it is 5 percentage points above the target.<\/p>\n\n\n\n It is important to understand that an increase from 60% to 65% represents a difference of 5 percentage points, not 5%.<\/p>\n\n\n\n The most direct method is to sell assets that are above their target allocations and buy assets that are below their targets.<\/p>\n\n\n\n However, selling assets may result in taxes and trading fees, so you do not necessarily need to rebalance through buying and selling alone.<\/p>\n\n\n\n You can direct new interest, dividends, and additional contributions toward assets that are below their target allocations.<\/p>\n\n\n\n If you are retired, you may consider withdrawing living expenses first from assets that are above their target allocations. This approach can reduce the amount of separate trading required.<\/p>\n\n\n\n You can also direct money from matured deposits or bonds toward assets that are below their target allocations.<\/p>\n\n\n\n After completing the rebalancing process, record the asset values and allocations before and after the adjustment, along with trading costs and taxes.<\/p>\n\n\n\n Recording the criteria you used can help reduce emotional decision-making when the market fluctuates again.<\/p>\n\n\n\n Set a regular review date or an acceptable allocation range in advance. If your living expenses or regular income change substantially, review your target asset allocation as well.<\/p>\n\n\n\n This method involves reviewing your asset allocation on a predetermined schedule, such as every six or twelve months.<\/p>\n\n\n\n It does not mean that you must trade on every scheduled date. You can review the allocation and make adjustments only when it has moved substantially away from its target.<\/p>\n\n\n\n This method makes it easier to remember when to review your portfolio and maintain consistent standards.<\/p>\n\n\n\n This method involves rebalancing when an asset allocation moves beyond a predetermined range around its target.<\/p>\n\n\n\n For example, if the target stock allocation is 60% and the tolerance band is 5 percentage points, you would review the portfolio when the stock allocation rises above 65% or falls below 55%.<\/p>\n\n\n\n The 5-percentage-point range is only an example and is not suitable for every investor.<\/p>\n\n\n\n Setting the tolerance band too narrowly may lead to frequent trading and higher taxes and fees.<\/p>\n\n\n\n With this method, you review the portfolio on a fixed schedule but make actual trades only when an allocation has moved outside its tolerance band.<\/p>\n\n\n\n This allows you to monitor your asset allocation without trading unnecessarily often.<\/p>\n\n\n\n Even when market volatility is high, checking your allocation and trading repeatedly every day may become a short-term response to market movements rather than genuine rebalancing.<\/p>\n\n\n\n Even if you realign your asset allocation through rebalancing, your retirement savings may decline rapidly if you continue withdrawing too much for living expenses.<\/p>\n\n\n\nWhat Is Retirement Portfolio Rebalancing?<\/h2>\n\n\n\n
Rebalancing and Changing Your Asset Allocation Are Different<\/h2>\n\n\n\n
Why Do Asset Allocations Change?<\/h2>\n\n\n\n
1. Different Assets Produce Different Returns<\/h3>\n\n\n\n
2. You Continue Withdrawing Money for Living Expenses<\/h3>\n\n\n\n
3. Interest and Dividends Accumulate<\/h3>\n\n\n\n
4. Investments Mature or Are Sold<\/h3>\n\n\n\n
5. Multiple Accounts Are Managed Separately<\/h3>\n\n\n\n
What Problems Can Arise When Asset Allocations Change?<\/h2>\n\n\n\n
A Rebalancing Calculation Example<\/h2>\n\n\n\n
Five Steps for Rebalancing a Retirement Portfolio<\/h2>\n\n\n\n
Step 1. Review Your Target Asset Allocation<\/h3>\n\n\n\n
Step 2. Combine the Assets in All Your Accounts<\/h3>\n\n\n\n
Step 3. Calculate the Difference Between Current and Target Allocations<\/h3>\n\n\n\n
Step 4. Choose an Adjustment Method<\/h3>\n\n\n\n
Step 5. Record the Results and Establish the Next Review Criteria<\/h3>\n\n\n\n
Three Ways to Decide When to Rebalance<\/h2>\n\n\n\n
1. Scheduled Reviews<\/h3>\n\n\n\n
2. Tolerance-Band Rebalancing<\/h3>\n\n\n\n
3. Combining Scheduled Reviews with Tolerance Bands<\/h3>\n\n\n\n
What Else Should Retirees Consider When Rebalancing?<\/h2>\n\n\n\n
Living-Expense Withdrawal Plan<\/h3>\n\n\n\n