Retirement planning is complicated. Your portfolio shouldn't be.

Four ideas to streamline your holdings and reduce your obligations

Christine Benz 20 August, 2019 | 2:00AM

Stack of rocks

I make a living, at least in part, by writing and educating about how to plan the financial aspect of retirement. It’s engaging and gratifying work for a couple of reasons. First, there’s always something new to talk about, whether it’s changes to the tax code or erratic stock-market behavior. In addition, people need the help: Even investors who are using an advisor to help them plan their retirements need to educate themselves or get a second opinion on various matters. 

Finally, and perhaps most central for me, is that the money aspect of retirement is inextricably linked with some really crucial life issues: achieving dreams like travel, helping children and other loved ones find their financial footing, and retaining independence for as long as possible. These life goals depend on solid financial resources, of course, but they also intersect with people’s quality of life and sense of purpose. 

Yet as much as I enjoy the retirement-planning arena, creating a financial plan for retirement is too dang complicated. Not only are many older adults making a lot of complex decisions without the requisite knowledge or training, but cognitive decline is a force to be reckoned with, too.

That’s why that when it comes to your investment portfolio, simplicity should be your watchword. Keeping your portfolio pared down and knowing what you own is important even if you work with an advisor, but it’s especially crucial if you’re one of the many DIY retirees I encounter. By maintain a fairly minimalist portfolio, you won’t risk getting caught in the minutiae of your investments and can instead devote your energies to more important issues like monitoring your withdrawal rate, right-sizing your insurance coverage, and reducing the drag of taxes and fees on your plan. You’ll also have more time for the activities that constitute your quality of life in retirement: running, volunteering, overseeing your fantasy football league, you name it. 

Having a pared-down portfolio can also be considered an estate-planning tool, in that it reduces your loved ones’ oversight obligations in case something should happen to you.

Whether you’re embarking on retirement in a few years or your retirement is already well under way, here are some steps to take to ensure that your portfolio is as simple and effective as it can be.

1)   Streamline your accounts.
Several of us will be bringing multiple accounts into retirement. But you can still do a bit of cleanup as you embark on retirement--or if you're well into it. Multiple tax-deferred accounts offer a major consolidation opportunity. Employing a single provider for all accounts can also greatly simplify your oversight and record-keeping responsibilities: You’ll be able to monitor your portfolio on your provider’s platform, and you’ll also receive your tax documentation from the same firm.

2)   Embrace simple building blocks.
You can really work some magic with streamlining on the investment portfolio itself. There are a few ways to go about it. If you have small accounts that are a minor piece of your nest egg, you may find some utility in all-in-one allocation funds. For larger accounts, you may wish to exert more control over the portfolio’s asset allocation, in which case broad-market index funds and exchange-traded funds can work well. Such funds enable you to populate your portfolio(s) with just a handful of inexpensive holdings and give you tight control over your asset-allocation mix, which is terrific from the standpoint of monitoring and figuring out where to rebalance.

Of course, low-cost actively managed funds can also work well in retirement, but they’ll require a bit more oversight on an ongoing basis. This article discusses some of Morningstar’s favorite retirement mutual fund picks.

3)   Prune faux diversifiers and other clutter.
You can also keep your portfolio streamlined by cutting holdings that you thought would supply diversification and/or returns but at the end of the day haven’t added a lot to your portfolio’s risk/reward profile. Plain-vanilla high-quality bonds, especially government bonds, have been the best diversifiers for equities. Meanwhile, other asset classes, including real estate, commodities, and various types of alternatives funds, have been less impressive diversifiers, and most investors don’t hold large enough positions in them to move the needle on performance anyway. 

In a related vein, many investors operate small "side" portfolios that consist of individual stocks. Such portfolios are usually ripe for the cutting. They often duplicate exposures found elsewhere in the portfolio, adding more complexity and risk than they improve the portfolio.

4)   Document and stick with a once-annual review.
Last but not least, I like the idea of documenting your portfolio plan, both with an investment policy statement that documents your financial goals, strategies, investments, and asset allocation and, when retirement commences, a retirement policy statement that covers a retirement details, your assets, your spending plan and your strategy. The former documents your approach to managing your investments, while the latter spells out your approach to broader retirement matters, such as your withdrawal rate. Having those policy statements can help you steer clear of distractions that might cause you to make changes you later regret.

Part of that documentation should spell out how often you'll monitor your portfolio. I'm a big believer in limiting your portfolio-oversight duties to a single comprehensive review per year, ideally as the year winds down. That way you won’t be tempted by market action to change up your portfolio, and you’ll have more time to focus on other things, financial and otherwise, throughout the year. 

As part of your annual review, you'll take a look at your withdrawal rate given your portfolio balance, assess your portfolio's asset allocation and liquid reserves, meet required minimum distributions, identify opportunities to save on taxes, and assess whether you can tie in charitable giving with your portfolio plan. That's a long list, so you'll need to set aside adequate time for it. But all of these activities are so intertwined that it makes sense to tackle them at once through a thorough annual review.

About Author

Christine Benz

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.