We’ve all heard about the importance of balance in our daily lives such as having a healthy work-life balance or eating a balanced diet, but did you know that you also need to balance and rebalance the allocations in your pension?

So, what exactly is a rebalance?

Rebalancing in terms of your portfolio – be it your investment portfolio or your pension portfolio – is simply a reallocation of the weight of your assets. In the case of your investment portfolio, it’s often used to maintain a desired level of return on those investments. Rather than getting into the nitty gritty of the traditional allocations in an investment portfolio, today I’m going to focus on what rebalance means for your pension.

Your pension, like your investment portfolio, has different stages based on your risk tolerance and time horizon. Unlike your portfolio, your pension fund focuses on only one event on that time horizon: your retirement. In order to retire, we first need to work, so let’s take a look at the life cycle of your career. I like to split it into three stages:

Stage One (Ages 20–35): The YOLO Years
Fresh-faced and new to the wild world of adulthood, you land a job. It has all the perks you look for as an adult: health insurance, paid vacation, sick days, and that gold ring of perks, a private pension through your employer.

When you’re enrolled in a pension scheme, you’re asked to choose a model (from conservative to aggressive), which will dictate what your pension funds are invested in. At this stage of your career, you should embrace the “you only live once” mantra (YOLO) and choose the aggressive option, assuming risk is perfect for you at this juncture; you have the advantage of time on your side, market cycles are essentially insignificant to the achievement of your long-term goals, and you can wait out any volatility.

My best advice during this stage is to also start making additional voluntary contributions to your pension now, while your overhead expenses are low. Although spending that disposable income may be tempting, I would advise you to delay that gratification and pay your future self first. What I mean by this is that for the cost of one lost weekend per month (i.e., one less weekend out with friends), you can essentially set yourself up for retirement as follows:

  • Think in terms of spending an average of $100–$500 for a weekend out with friends.
  • On average, the stock market will increase in value between 6%–10% per year.
  • If you anticipate the lowest end of that average increase and don’t account for inflation, the math works out like this:
  1. Start with an initial voluntary contribution to your pension fund of $1000.
  2. Next (and here’s where that lost weekend comes into play), consistently add $100–$500 per month for 40 years – work it into your budget right away and you won’t even notice it’s gone.
  3. You should end up with somewhere between $210,000 and $1M in voluntary contributions in your retirement fund – and that’s not including the 10% mandatory contributions that you and your employer split contractually.
  4. Congratulations! You just YOLOed your way to early retirement without even trying.

Stage Two (Ages 35–55): The Responsible Years
In this stage you’re settling in, you’ve found your stride at work, and you’ve (hopefully) had a couple of promotions and pay bumps. You may have actual grown-up responsibilities now (e.g., kids, spouse, mortgage, and bills to pay). This is not the time to slow down entirely, but it is time to do a rebalance.

As those responsibilities grow, the aggressive YOLO strategy you had in stage one is no longer appropriate. It’s time to start shifting to a more moderate pension fund (be it moderately-aggressive or moderately-conservative), and take some risk to your capital off the table. This shift safeguards some of the gains made in your portfolio over the years without limiting your pension’s growth. It’s a slower more stable growth compared to the wild YOLO days of your twenties, so a better match in terms of risk.

Stage Three (Ages 55–65): The Golden Years
This should be the best period in the life cycle of your career. Hopefully, it’s been spectacularly rewarding so far and you now find yourself taking increasingly more time off, spending those days with family and friends, learning new hobbies, and writing your bucket list. At this stage, you may be getting a glimpse into what life will be like in your retirement. Once again, it’s time for a rebalance. Now’s the time to focus on capital preservation so that your funds can maintain your lifestyle through what is hopefully a long and active retirement. Here you should be moving from moderate to conservative. The YOLO mantra can now be used for your personal pursuits and your pension can fund the fun!

Knowing when to rebalance and the act of rebalancing doesn’t need to be stressful or time-consuming, but it does need to be done. At the end of the day, it’s your money and you work hard for it! Knowing how to manage it should be no secret or rocket science. Keeping the typical life cycle of your career in mind can help you know when it’s time to update your risk profile, but if you’re uncertain at any point, don’t hesitate to check in with your pensions advisor. Regardless of what stage you’re in, if you want to talk about options, we can help.

Melanie Gauntlett is the Financial Pensions Advisor at Freisenbruch. To learn more, or if you have any questions, please contact her at mgauntlett@fmgroup.bm, or call +1 441 294 4660 or +1 441 296 3600.