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Three Things To Do With Your Retirement Savings Hodgepodge

This article is more than 9 years old.

Despite ongoing talk of the retirement crisis and people not saving enough, there are plenty of people who are good savers. Over time and through good habits wise folks have accumulated a nice nest egg. The problem is they haven’t developed a coordinated plan for best usage of their savings. They may have many of the essential pieces of the retirement puzzle in place, including:

  • Company retirement plan
  • Rollover IRA from a previous employer
  • An existing Roth IRA (which hasn’t been updated in years and no longer eligible for contributions)
  • Pension plan
  • Spouses 403(b) or 457 account
  • 529 plan for their kids
  • Some company stocks
  • Life insurance with some accumulated savings.

This is all good, and exactly what they’re supposed to have, but the sheer size and depth of all the moving parts, combined with a busy schedule and an ever-evolving list of investment options, can leave many feeling confused about how to sort it all out.

There are both personal and financial ramifications inherent in a hodgepodge retirement plan. Personally, it can leave people wondering if what they are doing is working. Since it isn’t an organized plan, it’s hard to gauge what’s working and what’s not. That’s frustrating and can get worse over time. In fact, by the time most people call a professional, they’ve reached a boiling point and just want to drop of a box of statements and come back when it's fixed.

Financially, it can make investing feel boring and methodical. Investors just keep throwing money into these plans and, subsequently, they just slowly sludge along, under-performing in many cases. It can also be expensive if they’re still using funds with front or back end sales charges, broker assisted trades, or have the wrong asset allocation. People may suggest that 50 is the new 40, or 60 is the new 50, yet it doesn’t change the fact that as you get closer to retirement it’s more important to keep what you’ve got than try to stretch it into more

This is particularly important right now because the markets have been on a consistent up trend up for the last four years. The summer of 2011 was the last time the market even ventured towards bear market territory which has left many feeling pretty comfortable and willing to put off the need to address their mess. However, when the market turns (and it will) many will be caught saying, “I knew it” or “I told myself I wasn’t going to let this happen.” Costly statements that can be avoided with some regular tweaks and planning.

Give each account a purpose

One of the most important things investors can do is give each account a role in their retirement plan. For example, earmark a Roth IRA as an aggressive portfolio dedicated to offsetting healthcare costs or for paying future long-term care insurance premiums. That can help an investor decide how to reallocate the funds as well as provide direction for managing it.

Instead of wondering how that stodgy old asset allocation fund is performing, reposition it for growth. It may mean suffering steeper losses in a downturn but, since there are still 20-30 years before its targeted use, investors can roll with the trade-offs and manage it with clear expectations and the appropriate time horizon.

Don’t put your eggs in too many baskets

The concept of not putting all your eggs in one basket can be taken too far and actually cause portfolio problems. Time and again I see portfolios being built like a small house, where one addition after another creates a home with a bunch of rooms that aren’t very functional. It’s commonly referred to as overlap, and can be even more troublesome for married couples who manage their accounts separately.

With their lack of tools, most individual investors don’t realize this, and providers of 401(k) returns aren’t required to disclose the risk management side of investing. Here’s the way it typically plays out: An investor chooses to invest in seven to ten different funds in their company retirement plan. Then they select another five or six in their rollover IRA, and another three to five in their Roth. For married investors, the spouse may be choosing another six or seven to boot. Their money appears to be very well spread out but it’s often not the case because when you drill down to find the types of companies actually being used in each fund, it reveals a lot of familiar faces. For example, five of the 12 different funds may each own Apple , McDonald's, General Electric , Caterpillar , AT&T , and other duplicates.

That makes it important to run a stock intersection, which helps identify where overlap or diversification traps exist. By knowing which funds are duplicated, investors can usually make adjustments and, in the process, reduce the number of total holdings without dampening the level of diversification and risk management they seek.

Come to terms with the retirement landscape

Nobody said retirement and investing is simple. There is no “easy” button or auto-pilot that lets investors just sit back and relax. That’s not to say they can’t simplify their plans, but to do so people have to take responsibility for their own retirement accounts. They have to regularly allocate time and effort towards it. The good news is there are more tools, resources, and information than ever before to help investors figure it out. Websites such as Forbes, Seeking Alpha, and Morningstar are great resources for doing research and regular homework / reviews.

There are also robo-advisors for internet savvy investors who prefer index or passive investing and wish to avoid the face-to-face meetings and costs associated with a personal advisor. There are still full-service firms who can help with everything, as well as a growing number of fee-based planners who charge a flat fee to review your portfolio without trying to sell you unnecessary life insurance or annuities. I, myself, have pioneered a program called Do-It-Together investing wherein we run all the technical MPT stats and intersections, yet the investor gets to implement and monitor the recommendations on the trading platform they prefer. We find that more and more people want to maintain control but aren’t adverse to a little help at a reasonable cost, particularly if it’s for actions they can’t or don’t want to do… like buying software and figuring out what it all means.

The beauty of these evolving options is that investors don’t just have to pick one and stick with it. They can start addressing their hodgepodge with a full-service firm, opt for a fee-based review, give a robo-advisor a whirl, or try Do-It-Together investing, then make changes as they adapt and learn the pros and cons of each approach.

Overall, a hodgepodge of retirement savings can sometimes feel like a burden that doesn’t excite you or motivate you to do more to strengthen your retirement plan. But there are simple steps, including giving each account a role, making sure you really are diversified, and aligning yourself with a professional service  in order to help you make sense of it all.