The Best Way to Simplify Your Finances in Retirement
Consolidating your financial accounts can reduce clutter, save you money and help your loved ones
If you look forward to a less complicated financial life in retirement, here’s one way to help make it happen: Consolidate all your investment accounts at a single financial institution.
By the time you reach your 50s or 60s, odds are you have money in more places than you can count. A mutual fund here … and there ... and there. A brokerage account someplace else. A stray IRA at a bank you once used. A 401(k) at a former employer. Not to mention what might be lurking in your safe deposit box.
It’s easy to drive yourself nuts trying to keep track of it all — and even forget an account or two if you’re not careful.
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A Painless, Low-Risk Money Move
But aside from simplifying your life, merging your accounts can offer another surprising payoff: Consolidating your finances can make you a better saver, according to a recent University of Kansas study. I’ll explain why in a moment.
Fortunately, merging your money is fairly painless and the risks are negligible or nonexistent.
If you're concerned about whether your money will be safe sitting in a single institution, bear in mind that most major brokerage firms are members of the Securities Investor Protection Corporation (SIPC), which provides coverage up to to $500,000 per customer in case the institution goes bust.
On top of that, major brokerages typically purchase what's called excess SIPC insurance, which can extend your coverage into the millions of dollars. (If you're likely to have more than $500,000 through consolidating, ask about excess coverage.)
At banks, the Federal Deposit Insurance Corporation (FDIC) backs up to $250,000 of each type of account (single accounts, joint accounts and revocable trust accounts and retirement accounts, like IRAs) and provides unlimited insurance for non-interest bearing checking accounts. Similarly, federally insured credit union customers are covered up to $250,000 by the Credit Union National Association.
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None of this coverage protects you against the normal gyrations of the financial markets, of course.
If you’re not convinced that consolidating your accounts is worth the time and effort, here are five reasons, plus advice on how to do it.
The 5 Benefits of Consolidating
1. You can see the big picture better. By bringing your assets under one financial roof, you’ll be able to quickly tell how much you’ve got and how hard your money is working for you.
By contrast, when your money is scattered among numerous banks, brokerages, mutual fund companies and 401(k) plans, it's a chore to determine exactly the amount of retirement income your portfolio is providing. It's also hard to know whether your desired asset allocation is out of whack (with too large a percentage in stocks and too little in bonds, for example) and in need of rebalancing.
If you’re still putting away money for retirement, here’s when consolidation can make you a better saver. That University of Kansas study found that people tend to spend less and save more if they have just one account, rather than several.
The reason? Multiple accounts make it easier for us to lose track of how much money we have, which in turn loosens our inhibition to spend.
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Though the research involved college students and bank accounts, Promothesh Chatterjee, an assistant professor in the university's school of business and one of the study's authors, believes there's also a lesson for retirement savers. "Since the basic psychological processes remain the same across different age groups, I think the findings will apply to older people as well," he told me.
2. You may qualify for lower investment fees. Often, the more money you have at a brokerage or mutual fund firm, the less you’ll pay.
For example, the mutual fund behemoth Vanguard divides its customers into four classes, from Standard for those with less than $50,000 in stocks, mutual funds and ETFs (exchange-traded funds) to Flagship Services for investors with more than $1 million. At each level along the way, trading gets a little cheaper. Investors in the under-$50,000 group pay $7 for each of their first 25 stock and non-Vanguard ETF trades, while those in the $1 million-plus group, for instance, get 25 trades for free.
3. You’ll have less paperwork (or fewer Web pages) to deal with. If you’re inundated with statements and literature from financial services companies and feel guilty about throwing them away unread, you’ll love consolidation.
And if you view these materials online instead, cutting back on the number of firms will mean fewer websites to visit and passwords to memorize, says Susan MacMichael John, a fee-only financial planner in Wolfeboro, N.H.
Better still: You’ll get relief at tax time, with fewer 1099-INT and 1099-DIV forms (which report your investments’ interest, dividends, and capital gains distributions) to round up every year.
4. You’ll have an easier time withdrawing money from your retirement accounts. As you probably know, once you reach age 70½, you must start taking annual distributions from your traditional IRAs. Determining just how much money you must withdraw each year means toting up all those IRA assets and following an IRS formula based on your age.
The more dispersed your IRAs are, the more complicated this annual ritual can be.
“If you have half a dozen accounts, it becomes a calculation nightmare,” John says.
5. You might make your loved ones happier. If you handle the investments in your household, keeping everything in one place will make things a lot easier should anything happen to you.
Your executor will also remember you more fondly if your assets are in one convenient location when the time comes to divvy up your estate.
Making Consolidation Happen
John suggests choosing as your custodian one brokerage firm or mutual fund company that has provided you with good service. If several candidates meet that test, go with whichever one has the lowest fees.
Next, call and ask the institution what steps are involved in moving accounts there and which types of assets it will or won’t accept. If you own something you can’t transfer, you can either liquidate it and invest the cash with your new custodian or simply keep the money where it is.
Also ask about how much of the transfer process the firm will handle for you; your goal is to delegate as much of the hassle as possible.
“Most often the custodian you’re rolling into will give you lots of help,” John says. Little wonder, since you could be their customer — and not their competitors’ — for years to come.
A Couple of Complications
Consolidating your accounts shouldn’t expose you to a tax hit, since the process is considered a transfer from one custodian to another.
That said, two kinds of financial holdings can complicate your money moves.
For instance, if you still hold paper stock certificates, you’ll most likely need to get a medallion signature guarantee to sign them over to your new account. Your bank probably has an officer who can do that for you at a nominal charge or possibly for free.
Bank certificates of deposit also require a little extra attention, unless you’re willing to pay a penalty for cashing in early. If you own any CDs, make a note of their maturity dates then bring the money to your consolidating institution as they come due.
For a CD in an IRA, be sure to arrange for a tax-free transfer. If it's not in an IRA, you can simply take the CD's cash and buy a fresh certificate from the new custodian.
Perhaps the best thing about consolidating is that, unlike many other financial chores, you only have to do it once. Then you’re set for life.
Greg Daugherty is a personal finance writer specializing in retirement who has written frequently for Next Avenue. He was formerly editor-in-chief at Reader’s Digest New Choices and senior editor at Money.