The older I get, the more critical simplification becomes to my wife and me, especially with our finances.
You don’t need me to tell you that we live in a highly complex world. Every decision we make, especially those related to our finances and retirement planning, seems pretty complex (or we tend to overcomplicate them).
If you read the “About me” page on this blog, you’ll see that one of the things I value, espouse, and have tried to practice in my retirement stewardship is simplicity:
My basic views on personal finance are that I value simplicity over complexity, pragmatism over sophistication, and I believe that money is a gift from God and a means to an end and not an end in itself.
I’m not talking about a Zen-like approach to personal finance in which we just put all our money in a jar, hide it in a closet, and hope it stays safe and grows as we meditate on it and send it positive energy. No, I’m talking about practical simplicity that reduces complexity, increases transparency and manageability, and enhances focus and decision-making related to our saving and investing decisions and actions.
Financial Planner and writer Carl Richards calls this kind of simplicity “The Simplicity on the Other Side of Complexity.” In one of his older blog posts, he talks about the difference between being “simplistic” and the beauty of “elegant simplicity.” He says,
We often confuse simple with simplistic. But the reality is that we often need to wade through a lot of complexity to get to simple. Simplistic, on the other hand, tries to pretend there’s no complexity to deal with and leaves us with answers and solutions that don’t really solve the problem.
So, when I talk about simplicity in the context of retirement stewardship, I’m not naively suggesting that it’s basic, easy, or non-complex. Rather, as Carl points out, I’m talking about working through the complexity to achieve the “elegant simplicity that is on the other side.”
In this article, I discuss some things you can do to simplify your specific situation. However, exactly how you do this and when will vary based on your unique circumstances, needs, and desires.
#1—Reduce the number of your bank accounts
I think one of the most important things you can do to simplify is to reduce the number of financial accounts you have to manage. When it comes to this, more usually isn’t better—more accounts can mean more complexity and confusion.
Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.
Sr. Issac Newton
In a US News and World Report article titled, Financial Simplicity Should be a Retirement Priority, a blogger named David Ning wrote,
Enticing sign up offers tempt us to open new accounts all the time. We might get a few hundred dollars to switch brokerages and $50 to open a checking account and end up with a complex mess of financial accounts. This hinders not only our ability to see the big picture, but the maze of complex rules can also get us in trouble in retirement.
He goes on to discuss the reasons for simplifying your investments before you enter retirement. He cites lower fees, better service, easier optimization, and making things a little better when you are retired.
You probably don’t really need more than one savings/money market or checking account or to have accounts with many different financial institutions.
If you think you need multiple accounts to help track savings and spending, the alternative is to break down a single bank account into virtual sub-accounts and track how much goes into/out of each sub-account. Some people do that with a simple spreadsheet, which can get tedious.
You can use a money management tool to create and manage sub-accounts, such as an emergency fund or “sinking funds” for quarterly or annual expenses. In some cases, banks may even offer this capability as part of their online banking services.
#2—Consolidate your insurance policies
Just as you probably don’t need multiple bank accounts that serve the same purpose, you probably don’t need numerous insurance policies for the same kinds of coverage. You can save money and stress by bundling your assets that need insurance and consolidating your policies. You can compare the various companies to see who will help you save the most in this process.
This may be particularly true of life insurance policies. Many people tend to have several, usually smaller, policies. Take a look at them holistically to see if you would be better off with a single term policy that gives you all the coverage you need. You may even find that it saves you money.
Also, consider consolidating your insurance with a single provider, as you may be eligible for some great multiple-policy discounts, perhaps in the 10% to 20% range. Plus, instead of dealing with numerous companies, you only have one point of contact to deal with, which can help simplify things.
One note of caution: Don’t just assume that using the same company for all your insurance policies will automatically be best for you financially—crunch the numbers and compare. Some companies will give you a discount for bundling policies but have higher rates on either the home or auto policies than you could get separately elsewhere. On the other hand, some may view the convenience of having a single provider as worth a slight premium.
#3—Reduce the number of your investment accounts
This one is pretty important but tends to be the most complex.
Retirees and those nearing retirement have probably been saving for years because they are older and have been with an employer (or multiple ones) with some kind of 401(k) or 403(b) program. And if they didn’t, they may have contributed to an IRA outside of work.
As a result, they may have some retirement savings accounts out there (or will eventually), perhaps of different types. (And hopefully, you know where they are. Don’t laugh – people do lose track.) As you plan for retirement, you will need to make sure that those assets grow and earn income (and certainly that they don’t disappear) so you can use them when you reach retirement age.
But here’s the problem: Some may have sort of, more-or-less, kind of, forgotten to pay attention to their retirement accounts as they moved from job to job. Even if they have had only a few jobs with different companies, they may have just decided to leave things alone for now.
That may seem right at the time, but over the long term, it can cause problems. You may not lose track altogether since you still get annual statements, etc., but you’re more likely to stop paying attention.
So, whether you’re in retirement or getting close to retirement, it’s a good idea to organize and consolidate your assets as soon as possible so you can track their progress and manage them holistically as a single portfolio of investments.
I know, they’re probably all in nice safe accounts paying you a good (??) return and available whenever you have time to do anything with them, right? Maybe, but how much are you willing to bet on that—a chunk of your retirement? Unwatched accounts and assets can just sort of drift away and may eventually end up in someone else’s pockets.
Incremental consolidation is a really good idea, but you need to get your act together by age 55. By then, they will hopefully have grown to the point that they need some serious attention, but that probably won’t happen if they’re sliced up into different, random accounts scattered everywhere.
The core of the problem is that it’s tough to look at each of those account statements and make sense of them each month (or every three months). They’re very likely to have different formats and varying, obscure language that just messes with your mind. Until you get them together into a minimum number of accounts, you’ll find the difficulty of understanding them too much to deal with.
The other—and I would argue much greater—problem is the difficulty of holistically managing your assets (a fancy-sounding word for “all together”).
When it comes to consolidating accounts, I try to practice what I preach. But sometimes, there’s only so much you can do.
For example, I still had several accounts before I “retired” on paper from a long-time employer after 20+ years and went back to work elsewhere a few months later. That included my IRA and my wife’s IRA (both were at Fidelity), and I had a 401(k) and a small Cash Contribution Plan with my old employer. Then, I started a new 401(k) with each of my two employers after “retiring.” I would have ended up with six retirement accounts if I had not consolidated them as I had the chance.
Why was I so anxious to consolidate them? More accounts, each holding different investments, mean more paperwork, statements, emails, logins and passwords, and forms. You can end up with a financial “junk drawer.” (I’ve got a junk drawer at home; well, to be honest, two or three. And I love everything that’s in them, even though I don’t know what all that is.)
Too many accounts can sap time, energy, and attention from important areas like your savings rate, investment decisions, allocations, and valuation. As you near retirement or are retired, every financial decision should lead to less time, less paper, less cost, less worry, and less bother. The fewer financial details you have to track, the easier it is to optimize the ones that matter; in other words, “elegant simplicity.”
After I retired in 2018, I consolidated all of my financial accounts at Fidelity. I know some “institutional risk” is associated with that decision, so I completely understand if you’d rather diversify across at least a couple of financial firms. But for me, the benefits of having everything in one place outweigh the risks.
I have a checking account, a savings account, a Traditional IRA, and a Roth IRA. I have about a dozen investments in those accounts and may simplify them further as I age. One approach would be holding just one or two balanced index funds for retirement income and perhaps a small income annuity to add to my income “floor.” (I keep going back and forth on the annuity decision.)
How to consolidate your retirement accounts
In order to manage your assets, you need a minimum of statements, and that means a limited number of accounts. In general, you can roll over retirement accounts into other ones to consolidate them.
The chart below is taken from the IRS site and shows different “from/to” possibilities, including “Qualified Plans” like Pension Plans and 401(k)s. (If some of the terms on this chart don’t make sense to you, don’t worry—most would be mainly concerned with “Qualified Plans” [like 401(k)s]-to- IRA transfers.)
As I’ve written previously, you have to get this right. As you can see on the chart, the key is like-to-like (based on IRS classifications) consolidating of accounts. You can’t merge an old Traditional 401(k) account into a Roth IRA, nor can you consolidate a Roth IRA into a Traditional IRA. So, there will be some limits to how much you can combine based on the number and types of accounts you have. I was able to consolidate all of my retirement accounts (except for a Roth 401(k) with my current employer) into a single Traditional IRA brokerage account, and I LOVE having it all in one place.
Where to consolidate these accounts is, of course, up to you. I recommend you consider low-cost, high-quality service providers such as Vanguard, Fidelity, Schwab, and USAA (for military and dependents; however, they sold their investment and brokerage business to Schwab). Each of these companies can handle the transfer and consolidation for you so that the money doesn’t flow through your hands, which helps ensure you don’t get hit with any IRS penalties.
So consider combining accounts to reduce confusion about account statements and improve your ability to understand how your assets are doing. If you don’t, you may find things somewhat tricky before you retire and regret it after you retire, or someone may have to unravel your finances after you’re gone.
#4—Get a password vault
I have already written an article about this, so I won’t go into much detail other than to say, PLEASE READ IT, ESPECIALLY THE SECTION ABOUT PASSWORD SECURITY.
Having a vault won’t necessarily reduce the number of passwords, but it will make managing whatever number you have much easier (and more secure).
Go paperless
We have to acknowledge that financial management is all about computers, tablets, smartphones, and the Internet nowadays. You can say goodbye to paper if you want to. All financial institutions now offer electronic trading, statements, and auto transfer and deposit options. I’ve changed all of our statements to e-mail or digital (online), even for our largest investment accounts.
One word of caution here, however: Be careful to ensure that your important emails don’t get lost in the sea of triviality that most of us deal with in our email accounts. If you are like me and get loads of emails (and perhaps have more than one email account), consider setting up an email account that is used just for your important financial accounts and other services. That way, essential communications, statements, and documents won’t get lost in the ever-rising tide of incoming emails.
Another thing to consider if you’re not already doing it is auto-deposit of your paychecks and also auto-withdrawals of any savings you are doing outside of what your employer is withdrawing from your pay, such as 401(k) contributions. You can set up auto-deposits for most checking and savings accounts, and IRA accounts for retirement savings.
If you’re retired, you can also set up automatic withdrawals from retirement accounts, including income tax withholding if necessary.
The majesty of simplicity
The late John Bogle, the founder of Vanguard and creator of the first index mutual fund, was a multimillionaire. He was not a billionaire, like some of the Wall Street characters who don’t have his sense of ethics or public service. He wrote an excellent book titled, “Enough: True Measures of Money, Business, and Life,” among others, and wrote:
…the key to whatever success I may have enjoyed during my long investment career is that the Lord gave me enough common sense to recognize the majesty of simplicity.
I think Mr. Bogle summed it up pretty well.
