Pre-Retiree Portfolio Simplification Steps

Why It Matters

Pre-retirees typically accumulate 5-8 different investment accounts across careers—old 401(k)s, IRAs, taxable brokerage accounts, and sometimes forgotten pensions (Vanguard, 2023). This fragmentation creates real problems: duplicated holdings, misaligned asset allocations, and administrative burden that compounds precisely when you need clarity most.

The practical antidote is systematic consolidation in the 5-10 years before retirement—reducing accounts, simplifying holdings, and positioning for the income phase ahead.

Definition and Key Concepts

Portfolio simplification for pre-retirees addresses three priorities:

• Account consolidation: Rolling old 401(k)s into IRAs, combining taxable accounts, and eliminating redundant relationships
• Holdings reduction: Moving from 15-25 individual positions to 5-10 diversified funds that accomplish the same goals
• Tax location optimization: Ensuring bonds live in tax-advantaged accounts and equities in taxable accounts (where capital gains rates apply)

The durable lesson: Complexity doesn't equal sophistication. A 3-fund portfolio (total stock, total international, total bond) can match or beat the risk-adjusted returns of a 25-position portfolio with 90% less maintenance.

The Consolidation Audit (Start Here)

Before making changes, inventory what you actually have:

The point is: You can't simplify what you haven't inventoried. Most pre-retirees discover 1-2 forgotten accounts during this exercise (often worth $10,000-$50,000).

What to Check for Each Account

For every account you find, document:

1. Current balance and asset allocation
2. Expense ratios (anything above 0.50% deserves scrutiny)
3. Surrender charges or exit fees (some annuities charge 5-7%)
4. Required holding periods (employer stock, restricted shares)
5. Beneficiary designations (often outdated after life changes)

Worked Example: The Fragmented Portfolio

Situation: Maria, age 58, has accumulated the following over a 30-year career:

Total: $855,000 across 6 accounts with 40+ positions.

The Simplification Plan

Step 1: Roll old 401(k)s to IRA ($147,000)

• Old 401(k) #1 → Traditional IRA (direct rollover, no tax)
• Old 401(k) #2 → Traditional IRA, but sell company stock first (80% concentration is dangerous)
• Maria's expense savings: $600/year from fee reduction alone

Step 2: Consolidate IRA holdings After rollover, Maria's Traditional IRA holds $292,000. She simplifies to:

Weighted expense ratio: 0.04% vs. previous 0.70% = $1,900/year saved

Step 3: Clean up Roth IRA Sell the 15 individual stocks, move to same 3-fund allocation. No tax consequences (it's a Roth).

Step 4: Optimize taxable account Keep equity ETFs (favorable capital gains treatment), move any bond funds to IRA when rebalancing.

After simplification: 4 accounts, 3 core holdings, $2,500/year in fee savings, and a portfolio she can actually manage.

Common Mistakes (And How to Avoid Them)

Mistake #1: Triggering Unnecessary Taxes

The error: Selling appreciated positions in taxable accounts to "simplify."

The cost: A $50,000 gain taxed at 15% = $7,500 to the IRS—potentially more than years of fee savings.

The fix: In taxable accounts, simplify through new contributions and rebalancing rather than wholesale liquidation. Use tax-loss harvesting to offset any necessary sales.

Mistake #2: Rolling a 401(k) When You Shouldn't

The error: Moving a 401(k) to an IRA when you're between ages 55-59½.

The consequence: 401(k)s allow penalty-free withdrawals starting at age 55 if you've left that employer (the "Rule of 55"). IRAs require waiting until 59½. Rolling too early can cost 10% penalty on early withdrawals.

The rule: If you might need the money before 59½, leave the 401(k) where it is until you understand the withdrawal rules.

Mistake #3: Ignoring Net Unrealized Appreciation

The error: Rolling employer stock from a 401(k) directly to an IRA.

The opportunity cost: Net Unrealized Appreciation (NUA) allows you to pay ordinary income tax only on the cost basis and capital gains rates on the appreciation when you take the stock in-kind to a taxable account.

Example: Company stock with $30,000 cost basis and $100,000 current value:

• IRA rollover: Pay ordinary income (up to 37%) on full $100,000 when distributed
• NUA strategy: Pay ordinary income on $30,000 now, capital gains (15-20%) on $70,000 gain later

Potential savings: $10,000-$15,000 depending on tax brackets.

The Simplification Checklist

Before retirement, confirm you've addressed:

Account Structure

• Consolidated to 3-4 accounts maximum
• Rolled old 401(k)s to IRAs (or confirmed reason to keep)
• Combined multiple IRAs at single custodian
• Documented any pensions or deferred compensation

Holdings

• Reduced to 5-10 core positions
• No single stock position exceeds 10% of portfolio
• Expense ratios below 0.25% (ideally below 0.10%)
• Asset allocation matches your risk tolerance and timeline

Tax Optimization

• Bonds and bond funds in tax-advantaged accounts
• Appreciated stocks in taxable accounts (for step-up basis potential)
• Reviewed NUA eligibility for any employer stock

Administrative

• Beneficiary designations updated on all accounts
• Trusted contact designated with custodians
• RMD timeline mapped (starts at age 73 for most)
• Spouse or family member knows where accounts are

What Comes Next

Portfolio simplification is the foundation for the income phase that follows. Once consolidated, you'll need to address:

• Withdrawal sequencing: Which accounts to tap first (usually taxable → tax-deferred → Roth)
• RMD planning: Required Minimum Distributions start at 73 and can push you into higher tax brackets
• Roth conversions: The window between retirement and RMDs may be optimal for converting Traditional IRA funds

The durable lesson: Simplification isn't about dumbing down your portfolio. It's about reducing friction so you can focus on the decisions that actually matter—like when to claim Social Security and how to sequence withdrawals.

Start the inventory this week. You'll almost certainly find money you forgot about.