Your retirement accounts should be working at maximum capacity to move you toward retirement -- firing on all cylinders, so to speak.
However, many Americans overlook the need to take a holistic approach and make sure all accounts are working together effectively. Failure to create a holistic, coordinated strategy that includes each retirement account could cause various problems, including:
-- Inappropriate allocation: Without a holistic approach, your various investment accounts could, on the whole, lack any real asset allocation strategy. Your overall allocation could be too aggressive, too conservative or lack the right mix of investments.
-- Overexposure to an asset class: Without synchronizing all of your accounts, you could have too many funds across several accounts that fall into the same asset class. That would mean you're not sufficiently diversified. At some time, every asset class experiences volatility. Consequently, overexposure to one asset class may eventually lead to heavier losses than necessary.
-- Too much stock: A portfolio filled with single stocks can be far less diversified than mutual funds, so I recommend having less of your money invested in single stocks. A disjointed investing structure could cause you to have more than that, and possibly far too much of one individual company stock and thus far more risk than is appropriate.
There are several ways to juggle all of your investments. Your individual situation combined with your personal preferences will determine what's best for you. The important thing is to create an overarching, comprehensive investing strategy that coordinates your investments in a way that fits with all of your goals.
Here are some things to consider as you take a holistic look at your retirement accounts:
1. Consolidate your accounts vs. retain several accounts. If you've moved between employers several times, you may have left some accounts behind -- 401(k), 403(b), 457, or Thrift Savings Plan, among others. If you've moved between financial advisors, you also could have a few individual retirement accounts or general investing accounts. If this sounds like you, you'll have to decide whether to consolidate or leave your money spread across several accounts.
There are numerous advantages to consolidation, but it really boils down to ease. It's way easier to follow fewer accounts by virtue of fewer online logins, fewer paper statements, fewer accounts to rebalance and reallocate when necessary, and fewer accounts for which you need to know the rules and stipulations. Consolidating your investing accounts will simply mean less overall time and energy.
2. Same allocation for each account vs. spread allocation across all accounts. Say, for example, you've decided to invest 20 percent in international stock funds, 25 percent in small-cap and mid-cap stock funds, 30 percent in large-cap stock funds, 15 percent in bonds and 10 percent in your company stock.
You could either apply that allocation to each and every investing account you own, or you could apply it once on a large scale to your entire portfolio of investing accounts. In the second case, no single account would have that allocation breakdown. When taken together, however, your entire investing portfolio would have the allocation.
Spreading your personalized allocation across all your accounts can create a lot of complications each time you rebalance, and those complications would be magnified with a reallocation. But it could provide the opportunity to use some tax laws in your favor. Some mutual fund investments incur taxes more frequently because of the underlying securities, and it may be beneficial to limit those funds to tax-sheltered investments, like a 401(k) or IRA. Additionally, given the limited fund selection of many employer-sponsored plans, you could utilize the available funds in your 401(k) account and fill in the gaps in your allocation through other investing accounts that have access to a wider variety of mutual funds.
3. Combined spousal strategies versus separate spousal strategies. If you're married or have a life partner, you can either integrate your investing strategies or leave them separate. Partners with drastically different investing goals and risk tolerance levels would probably feel more comfortable with separate investing strategies. However, if one partner doesn't want to deal with investing, and you both have relatively similar investment and retirement goals, it makes a lot of sense to take a combined approach and apply one investing strategy to all of the accounts you each own.
All of these considerations can be made separately, so any combination of the above possibilities could work for you. However, unless you are committed to researching financial markets and keeping up with tax regulations, there is a clear advantage to keeping it uncomplicated and opting for the simpler, easier choice in each case. Besides, it's always better to opt for an uncomplicated strategy with which you'll follow through, rather than a complex strategy that causes you to avoid dealing with your retirement investments altogether.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
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