How to Simplify Your Retirement Accounts — and Make More Money
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How to Simplify Your Retirement Accounts — and Make More Money

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One of the best strategies for saving for retirement is to have a mix of stocks and bonds that reflect your risk tolerance and investment timeline. That’s simple enough if you have only one retirement account. But who has just one these days?

Younger Baby Boomers held almost a dozen jobs from ages 18 to 48, and non-retiring workers more often choose to leave retirement funds in their former employer’s plan rather than rolling them over into an IRA, adding them to a new employer plan, or withdrawing the cash. That means retirement accounts keep piling up. It can get even more complicated when you add a spouse’s accounts to the mix.

The once-simple task of asset allocation must occur over many accounts, some that you can actively grow and others, like legacy 401(k)s that you can’t. The solution can be daunting.

“There is a lot of A-R-T that goes into working out this puzzle,” says Roger Stinnett, managing director of wealth planning at First Foundation in Los Angeles. “Allocation, resources and taxes.”

Related: The Best and Worst States for Retirement

Consolidate and simplify
Many financial advisers recommend consolidating as many accounts as possible, like rolling over ex-employer 401(k)s to your current employer’s 401(k) or an IRA. That should help to streamline account management and maintain your ideal asset allocation.

“You might also consider simplifying your investment strategy,” says Taylor Schulte, a financial planner with Define Financial in San Diego. “You don't need 15 funds to get ample diversification.”

Instead, you may just need a handful of low-cost index funds or a one-fund solution such as a target-date fund, Schulte says. But don’t forget to consider any fees associated with the investment because they can put a dent on long-term returns.

But “if an account has a different goal or tax structure, then your allocation will likely look different across accounts and it will require a more tactical approach,” he says.

Allocate each account
Instead of putting your bond investments in one account and your growth stocks in another, apply your ideal asset allocation to each and every account. Rebalance each account when allocation skews by 3 percent to 5 percent, says Daniel Lash, a certified financial planner at VLP Financial Advisors in Vienna, Virginia.

For example, if your ideal allocation is 60 percent stocks and 40 percent bonds, you will need to rebalance when that allocation has moved to 55 percent stocks and 45 percent bonds.

Here’s how: Pick the bonds that are up the most and sell them to return to your 40-percent allocation. Reinvest that money and buy equity investments that have fallen the most in value to return to the 60-percent allocation.

“Doing so forces investors to sell at relative highs and buy at relative lows,” says Lash. “Allocating one account to all bonds and another to all stocks makes this process of rebalancing more difficult since you may not be able to move money between accounts.”

Related: Why Your Retirement Calculator Could Be Your Downfall

Get sophisticated
Instead of applying your asset allocation to each account, treat your separate accounts as one big portfolio and allocate accordingly. This may mean that each account doesn’t reflect the ideal allocation by itself, but taken together they do. Start with the retirement accounts with the most limited menu of investments, says Stinnett. For instance, if your current employer's 401(k) only offers large-cap equity and bond funds, then start with those.

If you have multiple accounts that have limited options, look at them side by side and choose the better investment to fill a certain asset type or category. If the account is likely to grow, go for a balanced allocation to make it easier to rebalance in the future. For smaller accounts with the most flexibility, invest in core holdings of your asset allocation.

“This approach helps to alleviate the need to rebalance this account,” Stinnett says, “and makes it easier to rebalance your large account that you may be adding contributions to.”

‘Asset location’
Investors thinking about the tax consequences of their investments may consider an even more complicated plan to manage multiple retirement accounts. Randy Bruns, a wealth advisor at HighPoint Planning Partners in Downers Grove, Illinois, calls his strategy “asset location.”

Related: The Retirement Revolution That Failed: Why the 401(k) Isn’t Working

For example, Roth funds should be used for assets that offer the greatest long-term growth potential—stocks—because these accounts grow tax-free and have the longest time horizon. On the other hand, bonds should be held in pre-tax retirement accounts. This strategy shelters income and could possibly reduce your required minimum distributions later on if bonds underperform stocks, he says.

“Smaller distributions could mean less taxes, ultimately helping your nest egg last longer in retirement,” he says. “The trouble with asset location is that it's extremely complex to implement and manage. You'll need to monitor your overall allocation a few times per year and make adjustments when necessary.”

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