How rebalancing works

A target mix only means something if you say how the portfolio gets back to it. That is what the rebalancing strategy on Inputs is for. The two options are real projections, not labels on the same forecast, and they can land in very different places on the same plan.

This page is the comparison the dropdown does not have room for. It is not a recommendation.

The two strategies

	Steer the overall mix, limiting the tax (default)	Let it drift
What it aims at	The plan target	Nothing already held. New savings still buy the plan mix
Where it trades	IRAs, 401(k)s, and Roths first. Taxable accounts only as far as they can move without adding tax	Nowhere. Spending comes out of an account in the proportions it already holds
Extra tax	None	None, because nothing is sold to a mix
Where the mix ends up	On the target when sheltered accounts and cash flow can close the gap; away from it when the leftover lives in a taxable account with large unrealized gains	Wherever returns and the order accounts are spent in leave it

Two accounts, one all stocks and one all bonds, are already on target at 60 / 40 if their balances are 60 / 40. Rebalancing is a household rule, not a promise to hold each account to the mix you typed in. That mix is a starting state. The accounts table column is labelled Starting mix for that reason.

529 and HSA accounts are never traded toward the retirement mix. They are earmarked for college and healthcare. A 529 sitting at 40% stocks because college is close stays there, even if the rest of the plan is trying to get back to 70%. The Asset allocation chart at the bottom of Projections leaves them out for the same reason: a gap against a target that was never going to govern those balances is not drift, it is the plan working.

Steer the overall mix, limiting the tax

This is the default, and it is what a competent investor actually does.

Each year, after the living-year cash and tax have settled and after growth:

1. IRAs, 401(k)s, and Roths trade freely toward the household target. Trading inside them realizes no tax.
2. If that closed the gap, the year stops there.
3. Taxable accounts move toward the target using money that was already going to move: new savings buy whatever is underweight, and withdrawals come out of whatever is overweight.
4. A taxable sale happens only as far as it can be done without adding tax. A retiree with room under the 0% long-term capital-gains bracket will see some of this. A high earner facing 23.8% will see none of it, and will steer through retirement accounts and cash flow instead.
5. Whatever gap remains is carried into next year.

The card on Inputs reports how far the current mix sits from the target. Under this strategy a persistent gap is expected whenever closing it would mean selling a taxable winner. That is the strategy working, not a forecast that forgot to rebalance.

Tax: none added, under a budget of zero extra tax.

“Steer”, and the word is doing work. This aims at the target without promising to arrive. Whatever it cannot close for free is carried into next year, so on a portfolio with a large unrealized gain in a taxable account the mix can sit away from its target for a long time. That is the strategy choosing your money over your mix, deliberately.

Let it drift

Nothing already in an account is sold to get back to a mix. When the plan needs money it takes a slice of that account as it stands, so the proportions do not move on the way out. New savings still buy the plan mix: the same field, read as “what money coming in buys” rather than as a target, which is why the card relabels it Allocation for new deposits.

Two things then decide where the mix goes, and the copy must not blur them:

1. Returns. Accounts holding different things grow at different rates.
2. The drawdown order. Taxable accounts are spent first, then tax-deferred, then tax-free. The accounts drawn on first stop counting toward the overall mix first.

Do not assume it drifts toward stocks. The direction depends entirely on where you keep each holding. Bonds in the IRA and stocks in the brokerage leave a bond-heavy IRA behind as the brokerage is spent, so the mix drifts conservative. Stocks in the IRA and Roth, bonds in the brokerage, leave a stock-heavy retirement mix behind, so it drifts aggressive. The only claim that survives without knowing a particular plan is that the accounts spent first stop influencing the mix first.

This is the control, not a recommendation. What steering costs in tax, and what it buys in a mix that stayed where you put it, are both differences from this. Plenty of households never rebalance; that is a reason the option exists, not a reason to pick it. Run it against the default on a clone if you want the comparison.

Tax: none added, for the opposite reason from the default: the default pays nothing because it only rebalances where rebalancing is free; this one pays nothing because it does not rebalance at all.

What the model still simplifies

Rebalancing is all-or-nothing, once a year. There is no tolerance band: a 1-point overweight is traded the same as a 20-point one, and the trade goes the whole way rather than part of it. A real investor with a written policy usually lets small deviations ride. The model does not, because inside an IRA or a Roth the trade costs nothing, and the only thing worth stopping for is tax, which is exactly what the default strategy stops for.

The flip side: a retirement account can swing a long way in a single year. If your brokerage is all stocks and your IRA is half stocks, a good year for stocks can take the IRA to no stocks at all, because that is where the correction can happen for free. The household mix is what is being held steady, not any one account. That is the same reason the accounts table calls what you typed in a Starting mix.

Year-end rebalancing is after growth, outside the living-year tax solve. Spending and ordinary tax are worked out first; then the portfolio grows; then it is rebalanced. Rebalancing never adds tax under either strategy, so there is nothing here to fold into the year’s Tax Return Payment on the Cash Flow tab. See How taxes are estimated.

A later option that allowed some taxable rebalancing when an account was wildly off (a concentrated stock that ran up ten times, say) is not built. Both strategies here refuse to realize a gain to reach a mix: the default because it stops where it stops being free, drift because it never trades at all. A tolerance band belongs with that later option, where the question is how far off is far enough to justify a tax bill, and not with a trade inside a wrapper that is free either way.

Individual funds, expense ratios, and advisory fees are not modeled at all.

How to read the comparison

Trust the difference between the two strategies on the same plan more than either number on its own. The market is held constant across plans, so cloning and switching the strategy is a clean experiment: any change you see came from the rebalancing rule, not from a different roll of the dice.

A flat, calm market makes holding more stocks look free and rebalancing look expensive. The case for rebalancing is what happens in a bad sequence, which is what Simulations is for. Compare the two there, not only on the Projections line.