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One Retirement, Many Accounts: How Investors Allocate

Many readers said they treat their retirement holdings as part of one overall portfolio while others took an account-by-account approach.

Retirement savers have many decisions to make, and among the most important of these is how to invest their assets. Much attention is paid to the question of how much of one's retirement portfolio should be held in stocks versus bonds and to U.S. versus non-U.S. securities. But less often do you hear discussions of how to go about allocating assets earmarked for retirement when those assets are held in multiple accounts.  

One school of thought says that a retirement portfolio should be managed holistically, with all stocks, bonds, funds, and other holdings treated as though they are part of a single portfolio spread across various accounts. But things can get complicated--for example, what if the investor's 401(k) account holds the majority of his or her retirement assets but has a subpar fund lineup? And what if some retirement assets will be taxed upon distribution--such as those in a Traditional IRA or 401(k)--while others will be distributed tax-free--such as those in a Roth IRA or 401(k)? Add to this the complications of coordinating asset allocation between spouses and managing a portfolio holistically can be a real challenge.

Last week, we asked Morningstar.com readers in our Personal Finance forum how they manage their retirement accounts. Many said they use the holistic approach, but others said they manage each account's asset allocation independently. The reasons they favored one approach over the other were varied, as were their methods for maintaining their allocations. Below are some of their responses. You can read the full discussion here

Managing Retirement Assets Holistically
The majority of readers said that managing their nest eggs in a holistic fashion was the obvious choice and shared details about how they do so.

"We have two IRAs and two Roths and invest in three stock funds, three bond funds and (sometimes) a money-market fund," said jjdenver. "I use a holistic approach and use a spreadsheet to keep things organized. It tells me how much over/under our target we are for each fund overall. The holdings for each fund are distributed among two, three, or all four accounts to provide flexibility when rebalancing, but we do not try to keep the holdings identical between accounts. Minimum balances must be maintained for each fund in each account to qualify for Vanguard Admiral shares and there are frequent trading restrictions that must be tracked, so the spreadsheet helps with those details as well."

Others summed up their asset-allocation philosophy more succinctly, such as javajoe, who simply wrote, "11 accounts, 1 portfolio."

Several posters, including Russolo, described managing their retirement assets holistically as a couple.

"My wife and I maintain completely separate financial accounts, but for purposes of financial planning in retirement (I am 60, she is 56) we look at all our assets as one pool," he said. "We maintain our asset allocation (80% stock mutual funds, 20% bond funds and cash) across all the funds."

One argument in favor of the holistic approach, wrote freeland, is the fact that some retirement plans have investment offerings that simply aren't available elsewhere.

"Employer-sponsored plans may offer GIC/stable-value options that are available nowhere else," freeland wrote. "There's no reason to constrain the use of those unique options, which is what would happen if one allocated retirement assets on an account-by-account basis. On the other hand, employer-sponsored plans and variable annuities tend to have limited sets of options. I feel it is better to take the best of what each has to offer and round out my retirement portfolio using more flexible IRA assets as appropriate rather than take inferior options under an account-by-account allocation regimen."

Not everyone was dogmatic about the holistic approach. Blakie was among the readers who said they manage retirement assets holistically but with an eye toward their distribution time frame and other characteristics.

"I hold three retirement accounts: a regular taxable account, a Traditional IRA account, and a Roth account," Blakie wrote." I manage the three accounts holistically but with a degree of flexibility, mindful of the distribution order I expect to apply, risk-return characteristics, and taxation. Each account type is diversified, including U.S. and foreign stocks, an inflation component, an alternative component, and an income component. The risk-return characteristics are lowest in the taxable account and highest in the Roth account, with the individual account at roughly 50% stock and the Roth at roughly 80% stock. The total portfolio is typically in the range of 65% stock. ... I look to rebalance accounts annually and especially look to rebalance into assets that have performed poorly. I use Morningstar's  Portfolio X-Ray to track the overall allocation of all three accounts."

Adding Taxable Accounts to the Mix
Like Blakie, many other readers said they consider taxable accounts part of their retirement portfolio, even though they lack the tax advantages of employer-sponsored retirement plans and IRAs.

"I treat all my accounts as my haphazard playing field," said dooble. "I do not treat my IRA and 401(k) as different portfolios than my after-tax accounts. It seems kind of odd to treat them differently since some less-efficient investments are often better to have in a [tax-advantaged] account. Our [taxable/tax-advantaged breakdown] is about 55%/45% of investable assets. I don't see why I would not include the larger portion of assets in the retirement mix."

For BillInGA, a taxable account plays a key role in holistically managing his retirement assets.

"Shortly after retirement four years ago, we consolidated our many employer plans and IRAs into four accounts," BillInGA wrote. "We manage all of our investments holistically and select the best available in each account and then balance out our allocation in the joint taxable account. This allows us to both simplify and maximize the returns on our investments."

Among those who hold retirement assets in both tax-advantaged and taxable accounts, asset location--deciding which investments should go in which account type--was another hot topic of conversation.

Jomil wrote, "I have two retirement accounts, Roth and taxable, each nearly the same asset size. Because I take withdrawals from the taxable account, I try to have income producers there, as well as in the Roth. So my decision for several years now has been to maintain approximately the same equity and fixed income ratio in each account. With the taxable account, I consider tax efficiency when buying and selling positions. "

"I manage our multitude of accounts holistically, and follow the overall allocation with Morningstar portfolio [tools]," said pbmurphy. "The allocation of funds between tax-advantaged accounts and taxable accounts are based on tax efficiency. I keep my REIT, commodity, nominal international and domestic bond funds in tax-advantaged accounts. Because of the size of my portfolio, I have to keep some equities in tax-advantaged accounts but the majority of equity funds, especially international funds and tax-managed funds are kept in taxable accounts along with muni funds."

A few readers took issue with the notion of managing retirement asset allocation account-by-account.

"Manage each account separately? Never even crossed my mind," said Darwinian. "With IRA, Roth, and unsheltered accounts, some with separate brokerage accounts (thanks to Vanguard), for both my wife and myself, plus my 401(k), and our daughter's Coverdell and 529, this would be absurd and impossible. I created an Excel spreadsheet to list all my 15 funds by asset class, and to compare current values to my allocations. ... The spreadsheet tells me when and what to buy and sell, to rebalance and take income, and I am just the robot executing its orders."

"The idea of asset allocation is to manage the entire financial asset as a whole, not manage it account-by-account," said NinaBion. "I have a stock portfolio in additional to a Roth IRA, rollover IRA, and 401(k) account. My stock portfolio is 100% of course. So is my 401(k) because it is a smaller account compared with my other retirement accounts. My bond allocation is made in my rollover account because it is the largest account I own. In addition, I take into account my rental properties as well. A rental property behaves like a utility stock. It provides a steady dividend payment with a possibility of capital appreciation if it is acquired at a reasonable price."

In Defense of Managing Accounts Separately
But for all the support for managing retirement assets holistically, a sizable minority of readers defended managing them on an account-by-account basis and explained why they do it. Some said they have little choice.

Webapalooza wrote, "I've decided to manage each account as its own entity. Reason being, I cannot rebalance between accounts, so it doesn't make any sense to put only one or two assets in each account. My wife and I have six retirement accounts (two 401(k)s, two Roth IRAs, two rollover IRAs), plus we have an HSA [health savings account] that we treat almost like a seventh retirement account. I take a slightly different investing approach with each account, depending on the amount in the account and the investing options available (which are extremely limited in the 401(k) accounts, of course)."

"We still hold six retirement accounts that contain diverse assets that we manage on an individual account basis," said seaside1. "Considering the asset choices that are available for each individual account, it would be impossible to compartmentalize the holdings into separate retirement accounts solely holding stocks, bonds, mutual funds, real estate, annuities, etc. It has been well worth the effort to manage six separate retirement accounts on an individual account basis as they have all grown substantially in value over the years and will provide us with a financially secure retirement."       

Some of those managing their asset allocation by account explained how they go about it. FlyingCircus was one.

"I manage my 401(k), IRA, 529 (where possible), and two personal brokerage accounts with exactly the same asset allocation although with different ETF, mutual fund, individual stock, and fixed-income choices," the commenter wrote.

Some said they'd tried to manage multiple retirement accounts holistically, but that it didn't work for one reason or another.

"I started out on a per-account basis and tried shifting to [a] holistic view, but the jumble of investments once combined became almost unmanageable in my simplistic management/rebalance style," philippi wrote. "The accounts now sit pretty much untouched because of the confusion and are doing curiously well in spite of or because of it."

A complicated financial picture also can make the holistic approach difficult to execute. Emily17 said that at this point in life--she's in her 30s--managing accounts individually but with identical allocations just makes the most sense.

"Due to six-figure student loans, which we've just paid off, and switching to jobs that don't offer 401(k)s, about 80% of our savings going forward will be in our taxable accounts after maxing out our Roth IRAs," she said. "Right now our taxable accounts only contain about 40% of our total savings but, in the future, they will dwarf our tax-advantaged accounts. ... So we'll have to deal with bonds in our taxable accounts, and we like to diversify among international options. It will be difficult to manage."

For Advis1165, managing assets by account works as part of the bucket approach to retirement asset allocation.

"My wife and I manage several different accounts and use each for a different purpose, so each has a unique asset allocation," he said. "We use some for goal-based planning like a boat or vacation home and we use others to make the bucket approach. I find it easier to keep each bucket in a separate account. That way I don't have to confuse myself when making changes. It brings simplicity, clarity, and peace of mind in handling our investments. We had previously tried to manage our accounts in one large pool of assets, but it became difficult to keep things straight. Now everything has its place."

Comments have been edited for clarity and brevity.

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