Consolidating for Retirement

Most of you know that you need to put money into 401(k)s and Individual Retirement Accounts (IRAs) to save for retirement. But what you might not realize is that by holding too many of these accounts, you could be jeopardizing your long-term goals. According to Kristen Vitale, Senior Vice President, Program Manager for Itasca, IL-based First Midwest Financial Network, Americans on average hold two or more traditional IRAs (Investment Company Institute; June 2003). Having these multiple accounts can lead to increased plan fees, as well as make it difficult to assess where you stand heading into retirement. That’s why industry professionals like Vitale suggest the consolidation of various retirement accounts into one IRA.

The Benefits of One

First and foremost, funneling multiple accounts into one IRA can help you save on annual fees, Vitale says. “IRAs typically have some sort of annual fee, and by consolidating, you may save on costs,” she says. “You have all your retirement assets housed in one account, so you’re not paying multiple IRA fees.”

In addition, consolidating your accounts into a single IRA can give you more control over your investments. According to Vitale, 401(k) accounts offer various investment options but may be limited in scope, whereas with a self-directed IRA, you have more control over the investment option. Vitale says this is a reason to consider rolling over a 401(k) from a previous job into an IRA rather than into your new employer’s 401(k) plan.

Also, having one account versus a handful can help you obtain a clearer picture of your retirement plan. “A lot of people haven’t sat down and put their assets together to look at the big picture,” Vitale says. “They might have different accounts – brokerage accounts, mutual funds, CDs, annuities and perhaps a 401(k) that still remains with a previous employer. So it’s important to look at the entire picture, the whole nest egg, and assess the risks and historical returns to determine what they might expect in the future.”

By taking this step, you also can determine if your assets are allocated properly and whether or not they need to be rebalanced, says Steven Harder, National Manager of LPL Financial Institution Services’ Retirement Center, in Charlotte, NC. “By having everything on one page, you can make sure your asset allocation is in complete alignment,” Harder says. Remember though, past performance is no guarantee of future results.

Working with a Professional

Once you’ve consolidated your accounts and taken a big-picture look at your retirement strategy, figuring out what to do next can be the most difficult step. That’s where working with a professional financial consultant can be beneficial. Your consultant can clarify your asset allocations and help you understand your risk tolerance.

“Your financial consultant can sit down and clarify your asset allocations,” Harder says. “In the current market, people want to easily understand their financial implications, and they need somebody to help them through that.”

According to Vitale, getting good advice is also important because the regulations around savings plans can be confusing. For example, many people don’t realize that they can commingle 401(k) rollovers with IRAs, she says.

“The rules have changed and people don’t realize that you can consolidate. They think you have to keep these accounts separate,” Vitale says. “In addition, a lot of people aren’t aware of changes in IRA contribution limits and how they’re indexed for inflation. A lot of people are eligible to make IRA contributions, but they aren’t aware of it.”

Working with a professional also ensures you’ll continually monitor your plan. Your financial consultant will check in with you at least annually so you can re-evaluate your strategy and make adjustments if necessary. You don’t usually get that with a 401(k) plan. “There’s nobody acting as your advocate making sure you’re monitoring it on a regular basis,” Vitale says. “By teaming up with a financial professional who’s keeping up with you as your life changes, you’ll ensure that you’re regularly monitoring your plan.”

Finding a Path

As you assess your retirement strategy, it’s important to be aware of how much money you’ll need to retire. If you find that you’re not prepared to meet your retirement goal in the timeframe you wish, there are a few steps you can take to get on the right path.

The first step is to sit down and look at your portfolio with your financial consultant. You might find that you need to reallocate your investments toward products that have better return potential.

“It might require assuming more risk, but it’s about accepting how much risk you can withstand and how much income you really need,” Vitale says. “There are income-producing vehicles out there, but they all come with some level of risk. So you have to decide what is right for you.”

Next, you might need to rethink your projected retirement date, Vitale says. Because of the economy, many people are choosing to work longer. “It’s a lot harder to retire in a declining market,” she says.

Finally, you might need to scale back on discretionary expenses. “You can’t ignore the essentials. You have to pay your mortgage or your rent. You have to pay your property taxes. You have to pay your utilities,” Vitale says. “But when times are a little tough, that’s when you’ll need to give up or cut back on some of your discretionary expenses, such as travel and dining out.”

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