13 Feb Should I Streamline My Assets Before Retirement?

Streamlining your assets before retirement can have benefits as well as drawbacks. Perhaps you want to make your finances less hands-on so you can focus on your hobbies, travel, or loved ones. Maybe you want to simplify your streams of income or maybe you’re starting to think about getting your end-of-life affairs in order.

However, you also understand the risks of upsetting a financial balance that’s working well. What are the pros and cons of consolidating your investments and financial assets? We take a look at the pros and cons of consolidating your assets in this example scenario with a fictional character named Dan. 

Meet Dan, a Business Owner in Phoenix

Dan is a few years away from retirement, and he wants to make managing his finances as easy as possible so he can focus on other things. His top priorities are to preserve as much of his wealth for his beneficiaries as he can, while still generating a substantial retirement income. He also wants to avoid limiting his investment potential or losing out on large financial gains. 

Presently, Dan is trying to decide which of his assets to consolidate. He owns real estate property, stock holdings, retirement plans, cryptocurrency, and an LLC. He also has a large amount of cash savings in multiple bank accounts. Let’s see how Dan moves through his financial situation and makes decisions about each asset.

Streamlining Your Retirement Assets: An Example Scenario

First, Dan needs to assess the benefits and risks of each move. Researching his options is the best way to avoid unnecessary taxes, penalties, and fees. Some high-risk investments won’t make sense to keep, and some accounts could be combined to make management easier. Dan considers his options for each group of assets very carefully.

Cryptocurrency Investments

Dan decides to sell his cryptocurrency, because its value can be volatile and his risk tolerance in retirement will be much lower. However, this means he will have to pay capital gains tax, since cryptocurrency holdings are taxed as property when they’re sold. Dan moves the funds from the sale into dividend paying stock options, because he feels this is a safer move for retirement.  

LLC Holdings

Dan considers selling his business—or part of it—as he works on consolidating his assets before retiring. He doesn’t want to take an active role in the company any more but wants to retain control over large financial decisions. After he passes he wants the business income to provide for his beneficiaries. Dan decides to talk to an estate planning attorney about putting his LLC interests into a trust. He thinks this will allow him to protect his personal assets while retaining control and having his wishes respected, even after his death. 

Brokerage/Stock Accounts

Dan checks the expiration dates and exercise prices. He evaluates which options are essential for accumulating wealth and which ones can be sold. Most of his holdings can be combined into one brokerage account to make things easier to manage. With fewer financial institutions to keep in contact with and fewer accounts to review, Dan will have a lot more free time. 

Dan contacts his current brokers to ask about the advantages of merging all of his accounts into one. He takes note of things like transfer fees, closure fees, waiting periods and restrictions, and tax implications. He moves ahead with requesting a direct transfer of assets “in kind” so he can avoid taxes. (This move works best with assets like publicly traded stocks, EFTs, mutual funds, and bonds.) 

Real Estate 

Aside from his own home, Dan also owns a few rental properties in the Phoenix area. He considers two options. The first is hiring a property management company to handle the day-to-day operations of his rental properties, allowing him to step back while still receiving income. They would handle tasks like tenant screening, maintenance, rent collection, and resolving tenant issues. 

Another option Dan considered was setting up an LLC or a real estate investment trust (REIT) that will manage the properties on his behalf. This way, he could maintain ownership while reducing his personal involvement. Since this is a tricky decision, Dan calls an estate planning attorney to talk through the details and see which solution fits best. 

Bank Accounts

Dan decides to use the liquid assets in his savings and checking accounts to fund a living trust. He does this because he wants the cash in these accounts to avoid probate. By funding a trust, he will avoid court fees and preserve more of his wealth for his beneficiaries. It also gives him more control over the distribution of his assets as far as amounts and timing. 

Retirement Plans

Because Dan was the owner of an LLC and employed himself as well as others, he had a SEP (Simplified Employee Pension) IRA. This allowed him to contribute up to 25% of his income every year, so the account is sizable. He wants to protect it and make sure it’s easy to make withdrawals, so Dan rolls over the SEP to a traditional IRA. 

The Pros and Cons of Asset Consolidation

Pros: 

• It will give you a simpler way to manage your finances (less paperwork).
• Some banks offer lower fees when you consolidate your investment accounts.
• It makes it easier to track your savings and investments.
• Taxes are easier to file.
• It’s easier to calculate your required minimum distributions for retirement accounts. 
• It will be easier to execute your estate plan.

Cons: 

• Lack of diversification can lead to a loss of equity. 
• It limits your potential to grow your money. 
• Not every asset can be consolidated—for example, a ROTH IRA can’t be combined with a traditional IRA.
• The fees and investments offered in your 401K could be better than what’s currently begging offered in an IRA 
• May have to pay capital gains tax when selling assets like stocks, bonds, or crypto

Avoiding Lack of Diversification 

Many people think that streamlining their assets means hiring one company to manage all of their investments. This can make some people nervous, because they don’t want to put “all their eggs in one basket,” so to speak. However, the true risk of investment concentration is when your holdings are not diversified enough in the market. 

Lack of diversification happens when a person has a large portion of their money invested in just a few stocks or bonds. For example, if you have $1 million invested in stocks, and 90% of the stocks you own are in technology (Meta Platforms, Microsoft, Netflix), you have an investment concentration. This means if the stock price of those platforms dips significantly, your entire portfolio would take a big hit. 

But as we saw above in Dan’s example, you can streamline your assets and still preserve a great deal of diversity in your investments. How much you choose to diversify or consolidate your investments is up to you, but it’s always a good idea to consult a financial advisor as well as an estate planning attorney before you make a move.

Should I Roll Over My 401K?

Rolling a company 401K into an IRA is often a common step in retirement asset consolidation. It typically means moving your 401K retirement savings into a new account, like an independent IRA (separate from your employer). Your funds can continue to grow tax-deferred, and you’ll have some control over how the money is invested. A rollover is often a good choice if you’re looking to maintain the tax advantages and keep your investments in one place.

Can I Fund a Trust with a Retirement Account? 

You can, but funding a trust with an IRA is not recommended. Here are a few reasons why: First, the IRS says all individual retirement accounts must be personally owned and titled. Putting qualified tax-deferred accounts like a 401K, ROTH IRA, or SEP into a trust would force you to pay income tax on the entire amount. Placing your retirement accounts in a trust can be the right thing to do in certain situations, but you should always consult an attorney before making this move.

Streamline Your Assets Before Retirement with Expert Estate Planning

If you’re getting ready to retire, you should meet with an estate planning attorney. Talking to someone who understands Arizona’s tax laws and knows the rules for trust administration, can help you find financial peace of mind in retirement. 

At Phelps LaClair, we have been helping families across Arizona create solid estate plans and preserve their wealth in retirement. Our decades of experience have made us experts in handling all of the legal, financial, and relational matters of estate planning. If you’re wondering if you should streamline assets before retirement, we invite you to schedule a meeting with our legal team. You’ll be glad to know that your first consultation is absolutely free!

 

Images used under creative commons license—commercial use (1/13/2025). Photo by Bettina Nørgaard from Pixabay