6 Ways to Simplify Your Retirement Portfolio Plan

34185479_sI often speak to groups of retired or soon-to-retire people, and it’s clear that investing is a passion for many of them. They’ve been studying investing and the markets for many years, homed in on a philosophy that makes sense to them, and finally have time to give their portfolios their full attention.

The trouble is, many such investors reach that life stage with portfolios and/or strategies that are far too complicated. They frequently have too many distinct accounts, separate holdings–or both. They may also be employing strategies that require too much baby-sitting on an ongoing basis. Any time I hear a retiree say “I start by looking at the Dow Jones Industrial Average’s 20-day moving average” or “I don’t have time to work. I’m too busy managing my portfolio,” that’s a red flag that the strategy is more complicated than it needs to be. Even if investing is an avocation, as it is for many folks, too complicated strategies and portfolios can be readily derailed if, due to health or other considerations, the retiree is unable to put in the requisite amount of time to keep the whole thing up and running.

For those hurtling toward retirement, or already retired, and aiming to transition to a simplified but still effective portfolio mix, here are some of the key steps to take. Note that these steps are discrete–you can pick them off one by one in any order you choose. Moreover, you don’t need to wait until retirement is nigh to begin implementing a simplification strategy; most of these ideas make just as much sense for workers as they do retirees.

Strategy 1: Consolidate Like Accounts

While it would be nice if investors could rely on a single vehicle with tax benefits for retirement funding, the reality is more complicated. Depending on their incomes and their employment situations, investors can stash their assets in an array of tax-sheltered vehicles, including company-sponsored plans like 401(k)s and IRAs. Further complicating matters is that these accounts are subdivided into Roth or traditional. Investors can also invest outside of the confines of those tax-advantaged options by employing taxable brokerage accounts; this is often necessary for high-income types who have made the maximum allowable contributions to their tax-sheltered options. Thus, it’s not unusual for many investors to enter retirement with numerous disparate accounts. Couples’ financial affairs can get even more complicated because IRAs and company retirement plans are maintained for each individual, not for the entire family.

Upon retirement, consolidating all of these tax-sheltered accounts into a single IRA for each retiree, and steering multiple taxable accounts into a single account, can greatly reduce the number of moving parts in the retirement portfolio. (This chart depicts which account types are eligible to be rolled into an IRA, and this checklist discusses the logistics of IRA rollovers.)

Rolling everything into an IRA won’t be advisable in each and every situation; this article outlines some of the reasons why an investor should think twice before undertaking a rollover. Moreover, Roth and traditional accounts will need to remain separate unless the retiree would like to convert those traditional IRA assets to Roth; doing so entails a tax bill, as discussed here. Finally, it’s important to note that married couples will need to maintain separate tax-sheltered accounts in their own names; they can, however, jointly own taxable brokerage accounts, so such accounts should be streamlined into a single account.

Strategy 2: Strip your investment strategy down to the essentials.

As retirement draws near, it’s an ideal time to assess whether a simplified portfolio management strategy may be able to do the job just as well as a more complicated one. To help home in on one that’s streamlined and effective for retirement, focus on answering the following questions. First, what type of withdrawal rate will you use? And second, what approach will you use to extract cash from your portfolio? Will you rely on income distributions, harvest appreciated portions of your portfolio, or use a combination? Working up a retirement policy statement can help you articulate a clear and uncluttered approach to in-retirement portfolio management. You can also use your RPS as an “explainer” to help bring your spouse or other trusted love one up to speed on the strategy you’re using. (If your RPS is a multipage document with lots of investment jargon, go back to the drawing board.)

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