Consolidate: to combine separate items or scattered material into a single whole or mass. The definition makes consolidation seem tidy, productive and even a bit powerful.

With all those good vibes, it’s a wonder why people hesitate to use consolidation tactics in their lives, especially in terms of their retirement.

Many people have multiple retirement accounts through multiple different custodians with multiple different terms.  That is a lot of “separate items or scattered material” that can be combined into the “single whole or mass” that consolidation affords its users.  So if you are one of those people, it’s time you look into simplifying your retirement plans and consolidating those accounts.

But you might ask yourself, why consolidate?  Or when is the best time to consolidate?  Or how do you actually go about consolidating?  Well, since you asked…

Why:

The essential of why you should consolidate is best described by a demonstration.  Take a piece of paper at your desk, and now rip it in half.  Now grab a stack of 15-20 papers and try to tear that in half.  More difficult, right?  Materials are stronger when grouped together, we know that.  What most people don’t know is that when it comes to retirement accounts, grouping them works in essentially the same way.

Your financial position is much stronger when each investment isn’t standing individually.  Having multiple accounts leaves you at the risk of portfolio duplications in which similar investments have similar objectives and they overlap, wasting your assets with unnecessary risk.  Fees can be avoided and paperwork is simplified.  Also, by consolidating into one account, you are better able to adjust your investments in reaction to market changes by simply accessing one account.

When:

The question of when is less about timing, and more about in what situations it should be used.  Consolidation is an advantage to almost anyone who is looking for a simple and productive retirement plan, but there are certain instances in which it is a good strategy to apply.  For example, when many people leave a company, they leave their retirement funds with that company’s 401(k) or pension plan.  This is a great opportunity for consolidation as you can roll those funds into your IRA to increase your existing investment selection while also minimizing the number of accounts you have to manage.

It’s also important to understand the investment options available for different types of investments.  For example, Rollover IRAs have nearly unlimited investment choices, while 401(k) plans are usually limited to a maximum of 25 choices.  The more options you have, the more flexible your plans are, and the better off you are.

You also must understand which accounts are available for consolidation.  All traditional IRA’s can be combined, both deductible and non-deductible, but a Roth IRA cannot be combined with a traditional IRA.  Make sure you understand these stipulations before you make your decisions- or better yet, consult a financial advisor who can help you navigate this complicated maize.

How:

Here is the meat of the issue, how to go about this consolidation process.  With this there is good news, and better news.  The good news is that most of work involves information you already have.  The better news is that all you have to do is take that information and follow these simple, step by step directions and you will be well on your way.

The first step is to make a list of each of your individual accounts that you hold currently.  In this list, include details on each account such as the type of account, the current balance, its recent and long term past performance, as well as any fees associated with it.

Next, you need to think about and plan your retirement goals and investment philosophy.

The third step is to determine the plan or institution that best fits those goals.

After that, you can start to combine your accounts into that particular institution and plan that you chose.  This should begin with your smaller accounts, followed by the non-performing accounts and accounts with high fees.  Continue this until all your accounts have been rolled into one.  Then take all of your funds and determine the specific investments needed to reach the goals that you set earlier in the process, all in one tidy account.

The question that may arise at this point is: “what about diversification? shouldn’t my eggs be in separate baskets?”  Good point.  They should.  But there is a difference between that, and scattering the proverbial eggs all over the yard.  You should certainly diversify the investments within your newly consolidated accounts among a few asset classes that have varying levels of risk and expected performance.

When it comes to your retirement, it’s important to find ways to work smarter, not harder.  Consolidating your accounts is one of the simplest ways to do that.  Combine your accounts, limit your paperwork and strengthen your investments. Because as Aristotle once said, “The whole is greater than the sum of its parts.”