4 Ways to Simplify Your Retirement Portfolio Plan

These steps are discrete--you can pick them off one by one in any order you choose  

Christine Benz 08 August, 2016 | 9:36
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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 and 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.

Strategy 2: Swap into broadly diversified investment types

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.

Allocation(multi-assets) 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.

Strategy 3: 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.

Strategy 4: Create a master directory

One 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.

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About Author

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

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