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Investing Specialists

6 Ways to Simplify Your Retirement Portfolio Plan

Come up with a streamlined strategy, then skinny down the number of accounts and holdings that you have.

I 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.)

Strategy 3: Swap into broadly diversified investment types.

I know, I know: You love your [insert favorite niche investment type here]. But in the interest of simplification, retirees should also take a close look at whether two or three well-diversified holdings per account can take the place of a lot of smaller, more narrowly focused ones.

I've often enthused about broad-market index funds and exchange-traded funds as a terrific choice for investment minimalists of all life stages. Such funds give investors exposure to whole market sectors in a single shot, while also helping to lower the total costs of the portfolio. Employing such investment types can go hand in hand with a more simplified in-retirement portfolio strategy: Because broad-market index funds provide undiluted exposure to a given asset class (a U.S. equity index fund won't be holding cash or bonds, for example), a retiree can readily keep track of the portfolio's asset-allocation mix and employ rebalancing to keep it on track and shake off cash for living expenses.

Multiasset funds that combine both stocks and bonds may also serve a worthwhile role in a retirement portfolio, especially for smaller accounts that a retiree isn't actively tapping. But my bias is toward maintaining separate holdings for exposure to various asset classes, the better to facilitate rebalancing to deliver in-retirement cash flows. (This article discusses the drawbacks of using an all-in-one fund as a source of in-retirement cash flows.)

Strategy 4: Automate as much of your "paycheck" as you can.

One of the key attractions of an annuity, especially for retirees without pensions, is that it can supply a paycheck for a retiree, much as was the case during the working years. Trouble is, payouts on inexpensive, plain-vanilla immediate annuities are currently quite low--a function of today's very low-yield environment. Meanwhile, annuities that promise a higher return because they offer an element of equity-market participation are invariably costly and complex.

The bucket approach to retirement portfolio planning doesn't supply a paycheck per se, but it does include a cash fund (bucket 1), amounting to one to two years worth of living expenses, that can be tapped throughout the year for income needs above and beyond what's being supplied by certain sources of income such as Social Security and a pension. The retiree can refill the cash bucket on an ongoing basis with income distributions from his or her longer-term portfolio holdings, thereby supplying a component of the next year's cash flow needs; rebalancing proceeds could also be plowed into bucket 1 to supply any additional cash flow needed for the following year. Alternatively, a retiree could rebalance once a year to refill the cash bucket. This article delves into the logistics of and varying strategies for bucket maintenance.

Strategy 5: Create a master directory.

In addition to the retirement policy statement, another essential document for retirees (and investors at all life stages, for that matter) is a master directory documenting each financial account, including investments as well as other accounts like mortgages and credit cards. By creating and maintaining a master directory, you'll have a single resource with the crucial details on all of your accounts, including account numbers and URLs--no more hunting around for missing details or hitting the "lost my password" button.

A master directory can also be an invaluable component of your estate plan, in that your executor will readily be able to identify your financial accounts. Because your master directory contains much sensitive information, it's crucial that you keep it safe--either in a password-protected electronic document or, if a paper document, under lock and key. You can find a master directory here.

Strategy 6: Go paperless.

Managing paper clutter--and seeing to the safe disposal of those sensitive documents--can be time-consuming and may also distract you from your core jobs: keeping your portfolio on track and making sure it delivers you the cash flow you need. Moreover, all those paper statements may be costing you money, as many investment providers now charge extra for paper document delivery. This article discusses transitioning to a paperless filing system, as well as other tips for organizing your financial documents.