Most people would agree that there are already enough ways to lose control of both time and attention in everyday living. Having a complicated financial plan only adds to the information overload and doesn't raise your chances of enjoying a successful retirement.
Below are four ways to simplify your retirement plan today.
1. Consolidate scattered accounts
Having more accounts is almost certainly not better than having only a few. Randomly scattered 401(k)s and IRAs means more usernames, passwords, tax forms, investments held, and, in general, more occupied brain space. You can remove this unnecessary complexity from your retirement by combining old 401(k) accounts, for example, with your current employer's plan or rolling them into an IRA of "like-tax" status -- i.e., a pre-tax 401(k) goes into a traditional IRA, while a Roth 401(k) would go to a Roth IRA.
Perhaps most importantly, more investment line items -- or "investment clutter" -- can mean that your investment portfolio isn't deliberately allocated. In other words, holding 30 or 40 mutual funds in a single account can make it difficult to understand what's happening from an asset allocation perspective, and the problem is worse if you have this situation in multiple accounts. This can be expensive both in terms of time and transaction costs.
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2. Consider holding only low-cost index funds
Holding only a few low-cost index funds in your retirement accounts might seem like an oversimplified investment strategy, but that's exactly what makes it so powerful. It turns out that holding fewer, less-expensive investments (as measured by the expense ratio) is a proven strategy that's likely to boost your investment return over the long term.
According to S&P Global's SPIVA Scorecard, which aims to grade active vs. passive investing performance, nearly 90% of active, large-cap mutual fund managers failed to beat the S&P 500 over the past 15 years. The percentage rises over longer time horizons. The bottom line: It's unlikely that you'll be able to pick single stocks or active mutual funds that outperform major indexes over time, so consider that doing less -- and sticking with the indices only -- may actually be your best bet for retirement.
3. Don't take on more risk than you can bear
During the famed bull market of the 2010s, many investors grew accustomed to the idea that the market only goes up, even over short time horizons. This led many investors to up their risk appetite in the pursuit of pricey growth stocks, non-fungible tokens (NFTs), cryptocurrency, and other speculative assets.
Reality came first in 2020 with the COVID-19 pandemic, and then again last year when markets dipped into bear territory. Many assets lost well more than 50% of their value or more, leading people to face the harsh reality that money invested is money at risk -- especially if you're speculating.
Even if you feel you have money to lose, consider avoiding the hype when it comes to investing your retirement money. Stick with what's proven to work, and be mindful that the amount you're actually willing to lose is often much less than how much you think you're willing to lose.
4. Automate to the extent possible
Whenever you're faced with a decision, like how much to invest from every paycheck, you expend time and energy. Instead, consider automating repetitive processes to take the constant decision-making out of your hands. For example, you might consider:
- Setting up automatic bill pay for known and recurring charges.
- Turning on automatic withdrawals that move money from your checking account to an investment or retirement account.
- Looking into low(er)-cost money management services, like robo-advisors.
Not only will you save energy, but there's a good chance you'll also save more money when there isn't a layer of decisions standing between you and your desired behavior. Try it first with one account, and branch out from there if you like the results.
Aim for a peaceful retirement
Daily life in today's world is crowded enough, so don't make your retirement plan an additional source of clutter. Be sure to consolidate similar accounts where possible, monitor the number of investments you own, don't take on more risk than you can bear, and automate your financial life.
If you don't feel comfortable with taking all of the steps at once, try doing one at a time. Retirement planning is an ongoing process.
