Decluttering the Muddle of Multiple Retirement Accounts

Streamlining and consolidating multiple old retirement accounts can help you organize your retirement finances. Most employees move around these days, typically switching jobs 12 times over the course of their careers and spending about four years on average with each employer. It is no wonder that some of them amass a jumble of retirement accounts, each affected by its own rules, fees and paperwork.

A clearer picture

Whenever you are ready to think about retirement planning — which could be as soon as you are eligible for a company’s 401(k) plan — you should start considering your overall asset allocations. It is never too early to take a holistic view of your holdings and your future prospects.

When you become deluged with statements and communications for retirement plans, you may find it frustrating to grasp the unified picture. Bringing the accounts together will help you rebalance and keep a handle on your overall rate of return. Although you may believe that having more accounts will help add diversification, that may not be true. If the holdings overlap, the duplications will cancel out the advantages of spreading bets. Besides, your risk tolerance profile and financial goals are likely to change over decades.

Why consolidate?

There are compelling reasons for streamlining your retirement accounts:

• Less time monitoring.
• Fewer emails and passwords, less filing.
• Lower fees.
• More tax-efficient strategies.
• Easier maintenance of up-to-date records.
• Simpler recordkeeping for beneficiaries.

You might save on fees by whittling down a set of multiple accounts. The custodians who are legally obliged to report contributions or withdrawals to the IRS charge separate annual fees for each account. Moreover, when you consolidate the accounts, you will probably make fewer transactions, resulting in lower investment fees.

You are more likely to lose track of your current information details if you are swimming in a sea of separate retirement accounts. Collecting them together makes it simpler to keep accurate records, such as addresses if you move home or beneficiaries if you change them. Beneficiaries themselves may later struggle to deal with inherited accounts. They (or you, yourself) might face escheatment if an account remains inactive over about five years and becomes a taxable distribution.

Consolidation can also allay another hassle of required minimum distributions. At age 73, the SECURE Act 2.0 requires you take out some funds each year from qualified accounts, such as 401(k)s, 403(b)s and some IRAs. Each account will send you separate paperwork. You are personally responsible for removing the correct sum. Taking too little or forgetting a deadline could land you a tax penalty of up to 50% of the required withdrawal amount. That is one of the most Draconian penalties in the tax code!

Leaving well enough alone

The vast majority of 401(k) owners leave their money in a former employer’s plan, largely due to inertia. Yet there are circumstances when you might be better off sticking with some of your old retirement accounts. For instance, they might offer lower fees than a new company’s plan or provide more or superior investment options. Maybe the old plan is performing nicely; consider leaving well enough alone. Economies of scale often support large company plans, which can have dirt-cheap annual expense charges, whereas smaller firms may charge around 1.5%.

Be careful mixing diverse types of plans. For example, blending pre- and after-tax accounts may generate messy tax complications. In other cases, mixing is not allowed at all. For example, a spouse’s IRA cannot be consolidated while both parties are still living. Nor can two IRAs inherited from different benefactors be mingled.

Want to get your ducks in a row? Start by locating any old accounts by contacting former employers. Check websites for a state’s unclaimed property or the Department of Labor to find who administered your old plan.

Talk to your tax adviser about whether it makes sense for you to consolidate any remaining retirement accounts.

How Much Can You Withdraw During Retirement?

The magic number for retirement is 4%. If you calculate that portion of your liquid assets in the year you hang up your hat and thereafter continue to adjust each year for inflation, you should be covered for about three decades. Or so the theory goes. But since it was first created in the mid-1990s, financial planners have come up with several caveats and refinements in the search for the ideal balance between overindulging and scrimping.

Playing by the rule

Bill Bengen, who invented the 4% rule and published it in a 1994 research paper, studied stock and bond market returns from 1926 to 1976. He found that, even in the most challenging markets, using his rule, retirees could rely on adequate funds for 33 years. Life expectancy might be an additional factor. Would 33 years suffice for a lengthy retirement?

But Bengen has subsequently had second thoughts, based on fresh research. The creator himself fears the rule may have been oversimplified and worries that the returns data might be overly influenced by the drastic market downturns in the 1930s and 1970s. Perhaps, as the father of the 4% formula reflects, retirees could increase their withdrawals to 4.7% and still be protected. But wait! Bengen has revised his thinking once more, spooked by higher inflation since the pandemic. It might be more prudent after all, he reconsiders, to aim for 4.5% or 4.4%.

Another aspect of the rule is how to allocate assets in the retirement portfolio. The original rule advocated an evenly divided mix of common stocks and intermediate-term treasuries. That prescription, too, has evolved. In today’s climate, Bengen suggests 55% for stocks and a much smaller bond allocation.

Tweaking and revising

Inflation, which has dramatically resurfaced, is a key element. It is fine to advise retirees to adjust their math to factor it in, but which measure should they use? Although the Federal Reserve uses a target rate of 2%, it might make more sense to consider cost-of-living increases. In fact, in 1998, three finance professors from Trinity University concluded that retirees would need a rate below 4% for consumer price index-adjusted withdrawals. Those Trinity authors revisited and reaffirmed the rule in 2011.

Another difficulty is that the rule demands strict adherence. Followers are supposed to make a firm commitment to it, with no exceptions for big outlays.

In a broader context, many people tend to retire at market peaks, especially older workers who may be struggling to find employment. Yet that may prove the riskiest time to retire, as markets are about to turn downhill. They face the problem that their withdrawals will be more expensive in a bear market, while their accounts are shrinking without new inflows. If their needs remain fixed, with little room to pare down discretionary spending, then, more than ever, they could use some cushioning.

Lastly, the 4% rule does not account for taxes, investment fees, IRA withdrawals (including required minimum distributions after 72) and other income sources, such as pensions, annuities and Social Security.

Needs change

Life is unpredictable. A rigid retirement rule should not become constraining. Most people’s needs and wishes alter from one year to another, whether regarding medical bills or leisure activities. Longer term, spending patterns change throughout retirement: Most spend more in the first years, whether on travel or hobbies; then they hit a lull before finally increasing outlays on health spending later. Unfortunately, the 4% rule — or some variation of it — is not dynamic enough to capture that rhythm.

No single perfect answer exists. The best solution is to stay flexible and review your spending rate annually. If markets enjoy a boom, you might want to add a few “nice to haves.”

Although the 4% rule is great to keep in mind, your best bet is working closely with your financial adviser, who can help you adjust some version of a withdrawal rule to fit your personal needs and circumstances.