Practically Speaking, How Does One Rebalance?

[artemis]

What happens when you reach close to retirement age and you want to significantly increase your bond allocation? Do you turn your tax-deferred accounts entirely into bonds?

Sure, why not? There's nothing wrong with having your retirement accounts entirely or mostly invested in bonds, with your stock allocation in taxable. It's the overall ratio that matters, after all - and (assuming you're retiring at age 59 1/2 or older) you will want to spend down your 401k money, and (especially) any nongovernmental 457b money first, as the former is subject to RMDs (which means less time to grow until withdrawal must begin) and the latter is at risk of loss if your employer goes under. OTOH, the government doesn't care if you ever withdraw any money from your taxable account or Roth IRA. Holding those in reserve for the latter part of retirement gives them more time to grow (which is good as stocks typically outperform bonds over longer periods), and spending down the bond-heavy retirement accounts first gives you a rising glidepath (stock percentage going up with time), which is a good thing, as most of the risk in retirement finances occurs during the first few years before and after you retire (being forced to sell stocks in a severe downturn). Get enough growth going in taxable early, and that risk is largely mitigated.

Remember, it's the ratio across the entire portfolio that matters more than which account you stick what in. So why not optimize the latter to avoid capital gains from sales for as long as you can?