Advisor Tips for Rebalancing Retirement Portfolios

As we enter the fourth quarter of 2024, your clients have experienced typical market fluctuations. On the positive side, there has been a nice stock market rally, driven by strong corporate earnings and investor enthusiasm over the transformational nature of artificial intelligence technology. On the negative side, yields on bonds have climbed even higher, fueled by stubbornly high inflation, extending one of the most difficult periods in bond market history. Responding to such market changes by rebalancing asset allocations is critical, especially for retired clients.

The Importance of Rebalancing

“Your retirement portfolio needs to be carefully adjusted to avoid running out of money in retirement,” explains U.S. News & World Report. “Sometimes one part of your retirement portfolio experiences significant growth or losses, and you need to shift funds from one part to another to maintain your ideal asset allocation for your risk tolerance.”

In fact, the publication suggests that the volatility of markets requires a review of retiree portfolios “at least annually” and possible rebalancing if the asset allocation has strayed “5% or more from the base” percentages.

For your clients over 65, a well-constructed investment portfolio is the cornerstone of a secure and comfortable retirement. You can help them maintain their desired risk profile and income stream by periodically adjusting their asset allocation.

Key Considerations

Please find below some key considerations for rebalancing portfolios specifically designed for retired clients:

1. Risk tolerance changes

As clients age, their risk tolerance often decreases. Rebalancing should reflect this by potentially increasing the allocation to lower-risk assets such as bonds, even if it means a slight decrease in potential returns.

2. Sequence of returns

The early years of retirement are particularly vulnerable to sequence of returns risk, where a market downturn right after retirement can significantly impact the portfolio’s longevity. A more conservative allocation in the initial retirement years can mitigate such risk.

3. Sustainable withdrawals

Ensure the portfolio’s asset allocation supports your client’s desired withdrawal rate. Consider factors like inflation and potential healthcare costs when determining the necessary income stream.

4. Tax efficiency

Prioritize tax-advantaged accounts (e.g., IRAs, 401(k)s, etc.) when rebalancing assets to minimize tax liability from transactions. Likewise, consider “tax-loss harvesting” strategies to generate strategic losses from taxable accounts.

5. Legacy planning

Discuss your client’s estate planning goals and how the portfolio can be structured to facilitate a smooth wealth transfer. It may be advisable to rebalance assets now to avoid a more complicated process later.

Building the Cash Allocation

Your client’s target asset allocation should probably include cash. Many experts advise that access to cash should equal at least six months of living expenses. However, your retired clients who are living off of their investment assets will likely be more secure with a higher allocation to liquid, low-risk investments.

There may be a practical solution right in front of you if you have a retired client who needs to raise liquidity to build a larger cash allocation in their portfolios without selling off undervalued assets.

For some retirees, a life insurance policy is a valuable, underutilized asset. Although not often thought of in the same regard as a home or car, a life insurance policy is your client’s personal property that can be sold just like any other asset they own. If your client determines that he no longer wants or needs a policy, then help them assess its value in the secondary market through a life settlement.

A life settlement is a financial transaction that enables qualified policy owners to receive a cash payout that is greater than the cash surrender value, if any, but less than the death benefit, for selling their life insurance policy to a state-licensed financial institution called a life settlement provider. Upon conclusion of the sale, the seller is no longer burdened with future premium payments as they are assumed and paid by the buyer, who collects the death benefit when the underlying insured passes away.

For example, the recently published Life Insurance Settlement Association (LISA) Annual Market Data Collection Report found that consumers received $842 million from the sale of their unwanted life insurance policies last year, more than six times the cash surrender value of those policies. Therefore, seniors were paid $707 million more in life settlement proceeds than they would have received from insurance carriers. The data marked the third consecutive year of increased payments from life settlements in the U.S.

Where to Turn for Help

If you have a retired client who might be a candidate for a life settlement transaction, then it is advisable to work with a licensed life settlement broker like Welcome Funds. The broker determines a life insurance policy’s eligibility for sale and represents the policy owner’s best interests throughout the transactional process from start to finish. After initial qualification is confirmed and the applicable paperwork and authorizations are completed, the broker will negotiate with multiple life settlement providers who compete to extend the best offer to purchase the policy.

Conclusion

Portfolio rebalancing is an ongoing process, not a one-time event. Therefore, it is important to be vigilant, nimble and creative, like exploring a life settlement, to ensure that your retired clients’ portfolios remain aligned with their evolving needs and risk tolerance.

For more information on life settlements or to receive a free, no-obligation appraisal of your client’s life insurance policy, then please contact Welcome Funds at 877-227-4484 or go to www.welcomefunds.com.