(Morningstar) - I make a living, at least in part, by writing and educating about how to plan the financial aspect of retirement. It's engaging and gratifying work for a couple of reasons.
First, there's always something new to talk about, whether it's changes to the tax code or erratic stock market behavior. In addition, people need the help: Even investors who are using an advisor to help them plan their retirements need to educate themselves or get a second opinion on various matters.
Finally, and perhaps most central for me, is that the money aspect of retirement is inextricably linked with some really crucial life issues: achieving dreams like travel, helping children and other loved ones find their financial footing, and retaining independence for as long as possible. These life goals depend on solid financial resources, of course, but they also intersect with people's quality of life and sense of purpose.
Yet as much as I enjoy the retirement-planning arena, creating a financial plan for retirement is too dang complicated. As pensions have been ebbing away, more and more people coming into retirement are grappling with knotty issues like figuring out a withdrawal rate, managing taxes while pulling assets from various account types, and determining how to cover healthcare and long-term-care expenses from their coffers. Not only are many older adults making a lot of complex decisions without the requisite knowledge or training, but cognitive decline is a force to be reckoned with, too.
That's why when it comes to your investment portfolio, simplicity should be your watchword. Keeping your portfolio pared down and knowing what you own is important even if you work with an advisor, but it's especially crucial if you're one of the many do-it-yourself retirees I encounter. By maintaining a fairly minimalist portfolio, you won't risk getting caught in the minutiae of your investments and can instead devote your energies to more important issues like monitoring your withdrawal rate, right-sizing your insurance coverage, and reducing the drag of taxes and fees on your plan. You'll also have more time for the activities that constitute your quality of life in retirement: running, volunteering, overseeing your fantasy football league, you name it.
Having a pared-down portfolio can also be considered an estate-planning tool, in that it reduces your loved ones' oversight obligations in case something should happen to you.
Whether you're embarking on retirement in a few years or your retirement is already well underway, here are four steps to take to ensure that your portfolio is as simple and effective as it can be.
- Streamline your investment accounts.
- Embrace simple portfolio building blocks.
- Prune faux diversifiers and other clutter.
- Document and stick with a once-annual review.
1) Streamline your investment accounts.
Thanks to the tax code, most of us will be bringing multiple accounts into retirement: traditional tax-deferred accounts like IRAs and 401(k)s, Roth accounts, and taxable holdings not specifically earmarked for retirement. Those three silos must remain distinct, so there's a limit to how much streamlining you can do at the account level.
But you can still do a bit of cleanup as you embark on retirement—or if you're well into it. Multiple tax-deferred accounts, whether IRAs or company retirement plan assets, offer a major consolidation opportunity, in that it is possible to collapse them into a single large traditional IRA. There are some valid reasons to leave money behind in an employer-provided plan like a 401(k), like creditor protections or a stable-value fund, but aggregating the assets into a single IRA is the right call from the standpoint of simplicity and reduced oversight.
Similarly, multiple Roth accounts can be merged together and so can taxable assets. Employing a single provider for all of these accounts can also greatly simplify your oversight and record-keeping responsibilities: You'll be able to monitor your portfolio on your provider's platform, and you'll also receive your tax documentation from the same firm.
2) Embrace simple portfolio building blocks.
You can really work some magic with streamlining on the investment portfolio itself. There are a few ways to go about it. If you have small accounts that are a minor piece of your nest egg—for example, a small Roth IRA—you may find some utility in all-in-one allocation funds, such as Dodge & Cox Balanced (DODBX), Fidelity 4-in-1 Index (FFNOX), or a fund geared specifically toward retirement, such as Vanguard Target Retirement Income (VTINX). (That last fund aims to deliver a retirement "paycheck," much as the Bucket approach that I often write about seeks to do.)
For larger accounts, you may wish to exert more control over the portfolio's asset allocation, in which case broad-market index funds and exchange-traded funds can work well. Such funds enable you to populate your portfolio(s) with just a handful of inexpensive holdings and give you tight control over your asset-allocation mix, which is terrific from the standpoint of monitoring and figuring out where to rebalance. You could reasonably get away with a single total U.S. market tracker, an international index fund, a bond fund, and cash holdings. (Global index funds like Vanguard Total World Stock Index (VTWAX) provide all-in-one U.S. and foreign-stock exposure, but they're about 40% foreign stock, which may be too heavy a weighting for many retirees.)
Of course, low-cost actively managed funds can also work well in retirement, but they'll require a bit more oversight on an ongoing basis. For my money, some of the most worthy actively managed holdings for retirement are the ones that place a premium on limiting downside volatility—Vanguard Dividend Growth (VDIGX), for example, or Vanguard Wellesley Income (VWIAX).
3) Prune faux diversifiers and other clutter.
You can also keep your portfolio streamlined by cutting holdings that you thought would supply diversification and/or returns but that, at the end of the day, haven't added a lot to your portfolio's risk/reward profile.
Plain-vanilla high-quality bonds, especially government bonds, have been the best diversifiers for equities. Meanwhile, other asset classes, including real estate, commodities, and various types of alternatives funds, have been less impressive diversifiers, and most investors don't hold large enough positions in them to move the needle on performance anyway.
In a related vein, many investors operate small "side" portfolios that consist of individual stocks. Such portfolios are usually ripe for the cutting when I do my Portfolio Makeovers each year. They often duplicate exposures found elsewhere in the portfolio, adding more complexity and risk than they improve the portfolio.
4) Document and stick with a once-annual review.
Last but not least, I like the idea of documenting your portfolio plan, both with an investment policy statement and, when retirement commences, a retirement policy statement. The former documents your approach to managing your investments, while the latter spells out your approach to broader retirement matters, such as your withdrawal rate and when you'll claim Social Security. Having those policy statements can help you steer clear of distractions that might cause you to make changes you later regret.
Part of that documentation should spell out how often you'll monitor your portfolio. I'm a big believer in limiting your portfolio-oversight duties to a single comprehensive review per year, ideally as the year winds down. That way you won't be tempted by market action to change up your portfolio, and you'll have more time to focus on other things, financial and otherwise, throughout the year.
As part of your annual review, you'll take a look at your withdrawal rate given your portfolio balance, assess your portfolio's asset allocation and liquid reserves, meet required minimum distributions, identify opportunities to save on taxes, and assess whether you can tie in charitable giving with your portfolio plan. That's a long list, so you'll need to set aside adequate time for it. But all of these activities are so intertwined that it makes sense to tackle them at once through a thorough annual review.
A version of this article appeared on Sept. 22, 2021.
By Christine Benz
September 21, 2022
