For many people, thinking about mutual funds, asset allocation, and retirement accounts is akin to eating their broccoli. A Charles Schwab survey found that 401(k) participants spend twice as much time researching a new car purchase as they do managing their retirement investments. Yet, we all know how important investing for retirement is to our golden years.
One hurdle is complexity. Investing is difficult enough on its own, but some people make investing for retirement far more complicated than it needs to be. Here are five tips to help you simplify your investments and focus on what’s really important.
1. Rollover 401(k) accounts. Every time you change jobs you need to decide whether to roll over your 401(k) to another 401(k) or IRA. There are a number of factors to consider, such as investment options, cost, the desire to start taking distributions at age 55 penalty-free and avoiding required minimum distributions if you choose to work into your 70s. Another factor you should consider is simplicity.
By consolidating your 401(k) accounts, you minimize the work it takes to manage your investments. Rebalancing and tracking performance is easier when you have fewer accounts. If there isn’t a specific reason to keep multiple accounts, consolidating them is the best idea.
2. Consolidate IRAs. Similarly, consolidating IRAs can also make it simpler to manage your retirement investments. In the case of IRAs, there are fewer factors to consider. The rules on penalty-free withdrawals beginning at age 55 and delayed required minimum distributions for those who work past 70 1/2 only apply to 401(k) accounts, not an IRA. Maintaining a single IRA can make it easier to track your retirement savings and withdraw the correct amount in retirement.
3. Prune mutual funds. It doesn’t take many mutual funds or exchange-traded funds to build a diversified investment portfolio. In fact, many mutual fund companies offer a single fund retirement solution that diversifies across stocks and bonds, both foreign and domestic. Beyond these solutions, three to five funds should be more than enough to execute just about any asset allocation plan. With fewer funds, account management, performance tracking, and rebalancing all become easier.
4. Simplify asset allocation. For most people, a simple asset allocation will be sufficient to meet retirement goals. The primary asset classes are U.S. stocks, U.S. bonds, and foreign stocks. For some people it may be worth adding real estate investment trusts and emerging market equities. A simple asset allocation plan makes choosing and managing mutual funds much easier.
In contrast, some investors include country- and sector-specific allocations in their investment plan. The result is the need to add dozens of ETFs to address these complications. While this approach may be fine for those who want to spend countless hours managing their investments, for most people the complexity will not add appreciably to, and may subtract from, investment results.
5. Use time-saving investment tools. Using appropriate investment tools can reduce the time it takes to manage investments. One of my favorite investment tracking tools is called Personal Capital. The free tool automatically tracks an investment portfolio’s performance, expenses and asset allocation. Both SigFig and Fidelity also offer investment-tracking tools. And for some people a simple spreadsheet is all that’s needed. What matters ultimately is that the tool chosen saves you time and improves your management of your retirement portfolio.