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Declutter Your Finances: Put Your Wisdom to Work for You

Consider consolidating accounts, choosing fewer investments

You’ve read, I’m sure, that mental quickness declines with age (I live in grumpy denial of that fact, even though I’ve had plenty of proof). But there’s a much happier story to tell. Older people perform as well as or better than younger people on tests of financial decision-making. Our math skills might slip, but our accumulated wisdom triumphs.

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I learned this from recent research, when I was thinking about financial planning as we age. Behavioral economist Elke Weber, of Columbia Business School in New York, identified two kinds of intelligence: “fluid intelligence,” which we use to manipulate information, and “crystallized intelligence,” arising from a lifetime of experience. The fluid kind springs leaks (hmmm, what was the name of the movie I saw yesterday?). But the crystallized kind — what we’ve always called wisdom — continues to deepen right into our 70s. We get better at making judgments, not worse.

Pare down to essentials

To make wisdom work for us, we have to arrange our finances carefully. Older minds are at their weakest when they’re choosing among many options or dealing with lots of moving parts. We can be misled by complex new investments whose costs and benefits are hard to balance. On the other hand, we’re terrific at assessing potential risk, as long as we’ve seen a similar situation before. Our strength lies in following paths that we know well.

Weber’s advice to us wisdom-based folk? Simplify. Pare your financial life down to essentials that you can keep track of and understand. Call it your Decluttering Project.

You might start by making a list of everything that makes up your current financial life: all the bank accounts, insurance policies, annuities, mutual funds, brokerage accounts, retirement accounts and so on. This should be easy if you’ve kept good files. If not, it’s time to start.

Then begin to consolidate. If you have two or more IRAs, roll them into one. You don’t want small, forgettable accounts hanging around in different places. If you’ve retired, you might have left a 401(k) savings account with your former employer. That’s fine, if costs are low, you like the investments and can draw on the money easily. If not, roll the 401(k) into your IRA. The staffs at your company and the IRA will do all the work for you.

If your bank accounts are scattered, gather them, too. Fees drop when you keep enough money in a single institution. Banking online is simpler than writing checks by hand.

Declutter your investments. If you own individual stocks, get rid of the dogs you haven’t wanted to confess to. Then consider whether you want to own individual stocks at all. Blue-chip companies with rising dividends are only part of a growth and income strategy. When you rely on a limited number of stocks, “you’re probably not well diversified,” says financial planner Joseph Tomlinson of Greenville, Maine.

Choose fewer funds

In general, the more experience investors have, the less they favor individual stocks (too many bad surprises) and the more they rely on mutual funds. But fund portfolios need decluttering, too. There’s no reason to own 10 or 15 of them, Tomlinson says. They probably overlap each other. If you choose well-diversified funds, such as low-cost index funds that follow separate markets, all you need is a broad U.S. fund, a small-company fund, an international fund and an intermediate-term bond fund, spreading your money among them in whatever way you think is best. You might also consider a target-date mutual fund that allocates your investments across these sectors in a manner appropriate to your age, or an immediate-pay annuity, to create a guaranteed income for life.

Low-fee funds save you money, too. Paying 2 percent on a $250,000 fund portfolio is like writing a check for $5,000 every year. With index funds, you could pay $60 or less. I mentioned that our growing wisdom and experience help us make sound financial decisions right into our 70s. After that, however, the news is not so good. The decline in our fluid, quick intelligence catches up with us. It becomes easier to make mistakes. That’s the other great value of simplifying your financial life, Weber says. You’ve got your systems in place for when the shaky days come.

Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW.

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