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3 Ways to Simplify Your Financial Life in Retirement

Retirees can streamline their finances by collapsing multiple IRAs into a single account and taking advantage of technology, says Morningstar's Christine Benz.

Jason Stipp: I'm Jason Stipp for Morningstar. For retirees who like to be in charge of their portfolios, they may also want to consider some simplification strategies and letting automation do some of the work for them. Joining me with some of those strategies is Morningstar's Christine Benz, our director of personal finance.

Christine, thanks for joining me.

Christine Benz: Jason, it's great to be here.

Stipp: Alot of Morningstar readers like to be very hands-on with their portfolios--they enjoy it, actually--but some simplification could be a good thing for their plan and for their financial lives. Why is that?

Benz: Well, I think simplification is a valuable goal no matter what your life stage; but arguably, it's especially important when you come into retirement. For one thing, you want to free up time to do other things. You don't want to be jockeying among spreadsheets with all your free time. So, by trying to reduce the number of moving parts in your financial plan and letting automation do some of this work for you, you can free up time for really valuable things that you want to do in your retirement years. Another key consideration is that if, for whatever reason, you become disabled or can't manage your portfolio on your own, you want to try to reduce the number of moving parts in your investment portfolio and in your financial plan so that if your loved ones need to quickly get up to speed on what's going on with your plans, they can do so without having to deal with lots of different investment providers, for example.


Stipp: You brought a few simplification ideas today. The first one is one that we probably all face, which is sometimes you have a proliferation of IRA accounts. You say that you can collapse those into one IRA. It can make your life a lot easier when you have it with one provider?

Benz: Definitely. There are also people who have multiple company retirement plans lurking out there. As you come into retirement--or even before retirement--I think it can be really valuable to try to roll them up into a single IRA; that way, you have fewer statements to monitor, fewer different accounts to monitor on an ongoing basis. One thing I would say, though, if this is one of your goals is to make sure that that firm does a good job with all asset classes, especially fixed income. Over the past few months, I've been working on these bucket portfolios using different fund shops. I found it was much easier to create good portfolios when the fund shop fielded a good in-house lineup of bond funds, specifically. So, that's one reason why I can easily recommend Fidelity and Vanguard as good shops for retirees to hold all of their accounts because they do such a good job on the fixed-income side.

Stipp: You say there may be a few exceptions as well when you might want to stay in your 401(k) plan--stable value is one of those.

Benz: Right. Or if you have ultra-low-cost institutional share classes of funds that you couldn't possibly buy on your own. That's probably not such an issue going forward because ETFs have gotten very, very cheap as well; but it is something to keep an eye on. We talked to our users, and a lot of them are very enthusiastic users of stable value because it's tough to beat their yields with other cash instruments.

Stipp: Of course, stable-value funds are not available outside of those types of plans. You also say that a way to simplify is to switch to more index funds, if you hold a lot of active funds.

Benz: That'sright. Index funds give you a lot of diversification in a single shot. Of course, their costs are generally nice and low--not always, but generally. So, it's a way to reduce the drag of costs on your returns. But it just allows you to get away with fewer holdings. I think that's one of the chief advantages, especially for retirees.

Stipp: You also recommend that investors looking to simplify take advantage of some of the automation options on their accounts. How do those help?

Benz: Well, one that I often recommend is making sure that if you are receiving income or dividend distributions from your holdings, you can get those spilled directly into your cash account that you use for spending money on an ongoing basis. This is what we call "bucket one" under the bucket framework. But however you do it, I think that that can be a valuable way to ensure that your portfolio is stepping up and providing at least part of your in-retirement paycheck. That's one thing that I often suggest that retirees automate.

Stipp: RMDs--required minimum distributions required after a certain age for certain types of accounts--you can automate those, and that could be a lifesaver for you.

Benz: It can be because you're required to take your RMDs by year-end. But end of year is a busy time with a lot of things going on--holiday season and so forth--so as kind of a fail-safe on your plan to ensure that you don't miss an RMD, because the penalties are so high for doing so, you can switch on automatic distribution. I actually prefer that retirees get in there and be a little bit more strategic about where those RMDs get pulled from. In an ideal world, you would tie it in with your rebalancing and portfolio-management process. But in case you don't have time to do that, making sure that those RMDs get paid out of a cash account, I think, can make a lot of sense.

Stipp: Those penalties can be hefty if you miss an RMD. In the realm of automation, another tool you might use is automatic bill pay; it's not related to investments, but it can also be very useful for you.

Benz: Right. Of course, a lot of retirees are fully onboard with this; but for the holdouts, I would tell them to just bear in mind that it's actually safer--assuming your security software is up to date and your browser is up to date. It's actually safer to pay your bills online than it is to be passing checks around in the mail. More can go wrong with snail-mail bill-paying from a security standpoint than is likely to go wrong with online bill-paying. You're also going to ensure that you don't miss an important bill. So, if you've got your health-insurance premiums that you've got to pay, automating those payments can go a long way toward ensuring that you don't miss one of those important payments. Of course, I think it's quite a bit simpler to pay your bills online. You can just sit down and, in the space of 15 minutes, pay all your bills for the month. So, I think it's a real time saver.

Stipp: I don't think anyone really enjoys the bill-paying part.

Benz: Writing checks, no.

Stipp: Lastly, another way that technology can simplify life in retirement is through something called a password manager. Why might that be something that you would want to consider in retirement?

Benz: Here again, this is something that I think can be valuable for folks at all life stages; but the basic idea is keeping track of all your passwords for all the retailers you do business with and your banks and your insurers and other financial-services companies can become really unwieldy--also, making sure that your passwords are as strong as they can possibly be. So, these password managers, I think, can be very, very effective. There are a few different companies out there that offer these services, but it definitely can be something to add to your tool kit to try to reduce the ongoing oversight responsibilities of your total financial plan.

Stipp: And if something should happen to you and you have given someone you trust access to that password manager, that could help them facilitate in case something unforeseen arises.

Benz: That's exactly right.

Stipp: Christine--simplification rarely makes for bad advice. Thanks for joining us today.

Benz: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.