I've been thinking about what would be an excellent topic to write about as 2015 winds down, and we look toward 2016 and beyond. I decided to do an article focused on a concept/principle that appeals to me when it comes to stewardship – simplicity.
This topic seemed appropriate since most of us think about getting better organized in the year ahead. But it's also important because we live in a very complicated world and it seems like every decision we make, especially those related to our finances and retirement planning, is pretty complex (or we tend to over-complicate them).
If you read the "About" page on this blog, you will see that one of the things that 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 such that we just put all of 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 a practical simplicity that reduces complexity, increases transparency and manageability, and enhances focus and decision making as it relates to our saving and investing decisions and actions.
This kind of simplicity is what Financial Planner and writer Carl Richards calls "The Simplicity on the Other Side of Complexity." In one of his recent 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, or 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."
Finances and the issues related to retirement stewardship can be quite complex. There is no one-size-fits-all "simple" solution for any one person's retirement stewardship – there are just too many variables. Saving, investing, retirement income, Social Security, health care, long-term care, life insurance; the list goes on and on.
In earlier articles, I have tried to simplify some of the complex questions about saving for retirement, and I plan to address simplicity as it relates to investing and providing income in retirement in future articles. But in this article, I want to discuss some things you can do to begin to simplify things in your specific situation. But exactly how you do this and when will vary based on your unique circumstances, needs, and desires.
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 simply isn't better. In fact, 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." – Sir Isaac Newton
I recently read a US News and World Report article titled, Financial Simplicity Should be a Retirement Priority. In it, a fellow 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. Among them, he cites lower fees, better service, easier to optimize, 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 saving and spending, then the alternative is to break down a single bank account into virtual sub-accounts and track how much goes into/out of the different sub-accounts. Some people do that with a simple spreadsheet, but that can get pretty tedious.
If you need to create and manage sub-accounts, such as an emergency fund or "sinking funds" for quarterly or annual expenses, you can use a money management tool to do that. I have used Quicken money management software for many years (which I highly recommend IF you are willing to put in the initial time to get it set up and running), and the newer versions have a great feature that lets you use a planning tool to create "savings goals" within a particular bank account. You can "virtually" add and subtract money from it as needed. I use it for all of my sinking funds and saving sub-accounts, including my emergency fund, but it's all under a single Money Market Account.
And here's the good news: You don't have to purchase software like Quicken to do this. You can use something like Mint.com and similar services. Some banks may even offer this kind of capability as part of their online banking services.
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 accounts. 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 to be worth a slight premium.
Reduce the number of your investment accounts
This suggestion is one I want to focus on because it's the most important and also tends to be the most complex.
I am going to assume that some of you will take Ray Mulligan up on his suggestion in an earlier article to begin saving for your retirement EARLY; or, that many of you have been saving for years – probably because you are older and have been with an employer with some kind of 401(k) or 403(b) program. And if they didn't, you were at least contributing to an IRA outside of work.
So now you 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.
By the time you retire, you will probably have worked at some different organizations, and you've probably participated in approximately the same number of retirement plans. According to an article in Forbes magazine, based on data from the Bureau of Labor Statistics, today's average employer stays at each of his or her jobs for 4.4 years. However, the youngest employees, the Millennials, only remain about half that time:
Ninety-one percent of Millennials (born between 1977-1997) expect to stay in a job for less than three years, according to the Future Workplace "Multiple Generations @ Work" survey of 1,189 employees and 150 managers. That means they would have 15 – 20 jobs over the course of their working lives!
That could translate into a LOT of different retirement accounts. Plus, you may have some of your own (IRAs), perhaps more than one, plus you may have a spousal account or two in the household.
You were a dedicated, hardworking employee for each of those organizations, right? Okay, we won't go there, but you may have sort of, more-or-less, kind of, forgotten to pay attention to your retirement accounts as you moved from job to job. Even if you have had only a few jobs with different companies, you may have just decided to leave things alone for now.
Well, whether you're getting close to retirement or not, you need to get your assets consolidated and organized as soon as possible so you can track what's happening with them and manage them more holistically as a single portfolio of investments.
I know, 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.
Doing incremental consolidation is a really good idea, but by age 55 you need to get your act together. By that time, they will hopefully have grown to the point that they need some serious attention and even active management, but that probably won't happen if they're sliced up into different, random accounts scattered all over the place.
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 with managing your assets holistically (which is a fancy-sounding word for "all together"). More on this in a future article.
I have tried to stay on top of this myself. But even in the best case, before I "retired" from my long-time employer after 20+ years (on paper, that is, as I promptly went to work for another company), I still had several accounts. That included my IRA, my wife's IRA (both were at Fidelity), and I had a 401(k), a Defined Benefit Plan, and a small Cash Contribution Plan with my employer. That number was somewhat manageable, but still not the ideal that I sought; I wanted my retirement assets in one place. That may not be everyone's goal, but it was mine.
Why? Well, more accounts, each holding different investments, mean more paperwork, more statements, more emails, more logins and passwords, more 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. Near- and post-retirement, 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."
Now I have one checking account, one money market account, a savings account for my wife (as a Christmas fund), all at the same bank. I manage all of these with Quicken. Our retirement assets are at Fidelity in a single online brokerage account, and I have a small 401(k) with my current employer. We have just fifteen investment positions total between the two retirement accounts, not including cash. And I plan to continue paring that down. I expect to enter my 70's with only a few, or perhaps one or two balanced index funds for retirement income, and probably an immediate, inflation-protected annuity. End of story.
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 you can see, 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 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 of service providers such as Vanguard, Fidelity, Schwab, and USAA (for military and dependents.) Other good options are E-Trade, TD Ameritrade, and Ally Invest (formerly TadeKing). 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 the confusion about account statements and to 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.
Go paperless
We'd all have to acknowledge that nowadays financial management is all about computers, tablets, smartphones, and the Internet. You can say goodbye to paper if you want to. All financial institutions now offer electronic trading and 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 we all deal with in our email accounts. If you are like me and get loads of email (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 email.
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 to most checking, and savings accounts, as well as IRA accounts for retirement savings.
The majesty of simplicity
John Bogle, the founder of Vanguard, and creator of the first index mutual fund, is a multimillionaire. He is 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.