How to Rebalance Your 401(k)


You’re busy, you work hard, and you’re socking away retirement savings to your 401(k) every month. But are those savings working for you the way they should? Once a year, you need to rebalance your 401(k), 403(b), or other employer retirement account to ensure it’s still aligned with your retirement goals – and make changes, if necessary.

What Is Rebalancing?

Rebalancing is simply the process of adjusting the investments in your 401(k) to realign them with your original investment plan. Over time, the value of a particular investment may change, causing your 401(k) to drift from its original target. For example, if a particular mutual fund has performed poorly, it may now represent a smaller portion of your account than it did when you first set the allocation.

By selling some of the positions that have grown in value and using the proceeds to buy other positions that have not performed as well, you bring your portfolio back into balance. This process is also known as, “buy low and sell high”!

It’s good practice to rebalance your 401(k) once a year, ideally toward the end of the year. So, set a reminder in the fall during open enrollment in the fall to rebalance your account. This is a great time to plan out your contributions for the coming year and ensure you’ll get the full employer match.

How To Make Adjustments

When you log into your 401(k) account, navigate to the “Investments” or “Portfolio Allocation” section. Look for a link that will allow you to change your allocation or update your investment options.

When you’re there, you should be able to see the current allocation of your investments along with the option to adjust your allocation. Once you make the updates, your plan provider will make the necessary trades to bring your investments back into alignment.

Don’t forget to check the allocation for your future contributions as well. Some plans allow your current allocation and future contributions to be different – and they’re located in different places on the benefits website!

However, more and more frequently, employer plans have started adding auto-rebalance features that allow you to set a target allocation for your investments. Once the allocation is set, the plan automatically makes trades to keep your portfolio aligned with your target.

Each employer plan can be (very) different. So, if you’re not sure how to access the rebalancing feature or have any questions about the process, you should reach out to your plan administrator or HR representative for help.

How Should You Invest?

Now that we’ve figured out how to rebalance your 401(k), what should you rebalance it to? Figuring out your investment allocation depends on multiple factors such as your age, years until retirement, financial goals, and risk tolerance. Here are a few ways to help you zero in on allocating your 401(k) investments:

First, it’s a good idea to figure out your risk tolerance. The easiest way to do this is by answering a questionnaire about your investment goals, time horizon, and willingness to accept volatility in your investments. A great example would be Vanguard’s basic online risk tolerance questionnaire. Of course, these questionnaires can be subjective, so think of your risk score as a guideline and not something set in stone.

Next, think about your time horizon. If you’re closer to retirement, you may want to take on less risk because you’ll have less time to recover from a bear market. As I’ve mentioned in the past, the sequence of your returns during the first few years of retirement matters and will affect what you can sustainably withdraw from your accounts.

Finally, review your financial plan. As you map out the years leading up to retirement, you may find that you’re on track. If so, you have the luxury to take on more or less risk, based on your risk tolerance. If you’re a little behind in your saving, you may need to take more risk (to seek higher returns) to make your financial plan work. If you need help putting together a full, comprehensive financial plan, a fee-only financial planner can do all the heavy lifting for you.

So, schedule some time in the fall each year to review and rebalance your 401(k), 403(b), or other employer retirement plan. And if you haven’t rebalanced within the last year, there’s no time like the present!

If you need help with your investments and retirement savings, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

Prana Wealth Management LLC (“Prana Wealth”) is a registered investment advisor offering advisory services in the State of Georgia and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Prana Wealth in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant to an applicable state exemption.
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