Retirement Planning Part 2: Asset Consolidation

Financial Planner Chosen √

Once you have done your due diligence and partnered with a financial planner, the next step is going to be consolidating all of your assets.  So what exactly does this mean and what does it entail?

As we are building retirement assets, rarely are these assets all with one investment company.  There may be a couple of 401(k) plans, a 403(b), the online account you set up to trade stocks, the IRA your brother-in-law’s cousin sold you decades ago, a couple of old life insurance policies, a random individual stock account, and so on.

While some would argue that having these assets spread across various investment companies represents diversification, true diversification comes with the underlying investments within these accounts.  These underlying investments fall into what are called ‘Asset Classes.’  The important asset classes to diversify a portfolio include:

1. Large US growth stocks
2. Large US dividend stocks
3. Small US stocks
4. Developed country international stocks
5. Emerging country international stocks
6. Government bonds
7. Corporate bonds
8. Bank CDs
9. Gold
10. Cash

These 10 asset classes can provide all of the diversification an investor would need.

Think of investment companies as grocery stores, and asset classes as the goods inside of the grocery store.  Does buying a bunch of bananas at Price Chopper, another at Hannaford, and another at Wegmans represent a well-diversified fruit basket?  Of course not, if fact it’s the opposite as you are concentrated in just bananas.

Same with investment companies, diversifying across companies is not diversification, it’s diversifying across the underlying assets at the investment company that matters.

Just as most of us can get all of our goods from one grocery store, an investor can get all of their diversification from one investment company.  What are some of the other benefits of consolidating assets?

• Tax Filing – Ever worry about whether you have all of your tax documents, when they will arrive, and when you should schedule a meeting with your accountant? By consolidating and working with one financial planner, he or she can provide all of this to your accountant on your behalf, so you don’t even have to think about it.

 

• Required Minimum Distributions – At age 70.5, individuals are required by the IRS to begin taking distributions from pre-tax accounts. Coordinating this process amongst several investment companies can become a headache and create a greater opportunity for a mistake and an IRS tax penalty.  The current IRS tax penalty is 50% of any missed distribution.

 

• Portfolio Management – It’s very difficult to even know your exact allocations to the various asset classes when your accounts are spread out, let alone be able to take advantage of ongoing rebalancing, an important staple in prudent portfolio management.

 

• Retirement Income Planning – When the time comes to begin drawing money from retirement assets, it’s important to understand where that income is coming from. Is it truly interest and dividend income or are you selling principal to meet your income needs?  Imagine drawing money from an account heavily invested in stocks during the 2008-2009 down market and having to sell those stocks at a 40% discount to meet your income needs.

 

• Cost Savings – Many financial professionals and investment companies offer a tiered cost structure, the more money you invest with them, the lower your overall costs.

The consolidation of assets would be coordinated by the financial professional with your primary responsibility being the gathering of all financial statements.

Asset consolidation can create clarity, efficiency, cost savings, better portfolio management and several other benefits as you continue to plan and prepare for retirement.

Retirement Planning Part 1: Partnering with a Financial Planner

Retirement Planning Part 3 – Portfolio Management