This article is by staff writer William Cowie.

Retirement, that magic day you’ve had in your sights for decades, is finally coming into view. You may be in your 40s or 50s, and the big day may be next month or in a few years. Whatever your age and whenever the day, the time is coming for the big question:

What do you do now?

What to do in retirement?

I faced that question a few years ago, and I remember it well. My first reaction was terror. This is so final — you can’t turn back the clock and you don’t get any do-overs. (How many times I wished for just one!) All my bad decisions had grown up around me (or not grown, to be more accurate). Now, I was faced with two pretty large questions:

  • What income will I live from?
  • What will I do with my time?

What will you do in retirement?

You might think the first of those two questions would have been my main retirement focus; but in hindsight, the second is even bigger. It’s that age-old question: What are you going to do when you grow up?

Many people never give much thought to that question as they furiously run the rat race, focused on making payments, raising kids, keeping up with various Joneses, and generally “making it.”

Step back for a moment, though, and try to imagine what will happen. The first day is just like every Sunday. You wake up with no alarm, and do whatever you consider is fun to do. You don’t have to get dressed and rush off to work. After a week or two, though, it begins to sink is: This is different — it’s Sunday every day for you now.

How will you fill your retirement days when the novelty wears off?

It’s easy for many to dismiss what has become the Leisure World image: fuddy duddies in plaid pants and white belts riding their golf carts around the course, while the wives gossip and play bridge with the other members of the blue-rinse set.

But, what will you do that’s different? You can gallivant across the globe like J.D. Roth, but the reality is that most of us are probably not going to retire with that much money or that much of an adventurous spirit. I’ve asked many people in their 30s and 40s what they will do once they retire — and you’d be amazed how often I get a blank, deer-in-the-headlight look back in response. It’s a lot like Art Linkletter asking those little kids what they’d do if they were president. (One little girl famously said she’d order husbands to kiss their wives a hundred times a day.)

Most of us simply don’t know how we will pass the time in retirement. It took me a few years after I stopped commuting for a paycheck to figure out what I really want to do. What I looked forward to on weekends wasn’t enough to engage me for 16 hours a day. (Oh, that’s right, when you retire, you have 16 hours a day to fill, not just eight.) A couple we know from California simply stay at home and putter around. He recently confessed that they bought his wife a new car, but after three years it only has 3,000 miles on the odometer. (This is in Orange County, California, where public transportation is non-existent, so those are pure stay-at-home miles.)

There are many people who want to retire early, without defining what they want to do when they retire. They end up simply getting another job because it’s all they know.

So, the first thing you need to spend some brain time on is to figure out what you want to do when you no longer have to grind out a living. For me it was writing — something I had no clue I’d ever want to do until my mom idly remarked that my sister is so gifted with writing, what a pity nobody else in the family caught that gene. Ha! Sibling rivalry being what it is, I took up the challenge; now I’m the writer, and she’s still figuring out who she wants to be when she grows up.

But this is Get Rich Slowly, not Get Old Slowly, so let’s talk about the money for a second.

Structuring what you live from

No, this is not the standard lecture that you better start saving because old age creeps up on you faster than Speedy Gonzales; that’s a topic all to itself.

If you’ve been smart and availed yourself of 401(k) or similar retirement plans wherever you worked, and you changed jobs along the way, you may have accumulated a motley collection of retirement accounts: 401(k), Roth IRA and regular IRA.

Now the question is: What should you do with that assortment of nest eggs? Should you consolidate and simplify your budding financial empire in preparation for your freedom years?

Short answer: Yes.

Why?

The human mind has a hard time keeping up with complexity: Restaurants with complex menus lose customers. Are you on top of all your multiple accounts right now? Probably not. It’ll be much easier if you just had two or three.

How do you consolidate?

For starters, get out of all your 401(k) plans and roll over the money to an IRA account. You may not be able to do that with your current employer, but you’re allowed to do that with inactive 401(k) plans.

Why roll over to an IRA? Two reasons:

1. Returns: The standard most mutual funds aim for is the S&P 500 average (around 8 to 9 percent per year, depending on which dates you pick). Now, that being an average, you would expect half of all mutual funds to beat that, wouldn’t you?

You would be wrong. Fewer than 25 percent of all mutual funds beat the S&P 500… and it’s never the same bunch. Therefore, odds are your 401(k) funds underperform the S&P 500.

You can do better by rolling those over into a single IRA and investing it all into an S&P 500 index fund. Please note: I’m not saying an index fund is the best you can do, only that it’s one simple action likely to improve your returns.

2. Fees: Most 401(k) plans charge fees which eat away a significant portion of your earnings. Most plans are captive, meaning you, the employee, can’t choose just any mutual fund you want — you can only pick from the menu they offer you. And all of those mutual funds have a management fee.

Not only are you stuck with mutual funds which charge you a fee, but the 401(k) plan itself has plan administration fees. They may be hidden, but you’re always paying two layers of fees with 401(k) mutual funds. Both sets of fees eat away at your returns. The way they quote those fees makes it sound like they’re small, like 2 percent or something like that. Considering the return before fees (at best) will be something like 9 percent per year over the long haul, that 2 percent ends up being more than 20 percent of your earnings. To get a better idea of the magnitude of the fees, you need to divide the fee by the return. When you do that, they’re not so small anymore.

You can get a self-directed IRA account for free at most online brokerages, and you can pick any mutual fund you want. (You are not limited to your employer’s menu.)

But that’s not all. You can invest in any individual publicly traded stock you want, too. So, if you think Warren Buffett’s Berkshire can earn you more than that S&P 500 index fund (and it has for decades), you have the option to invest that way.

With your own self-directed IRA, then, you can significantly increase your earnings over those inactive 401(k) funds from previous jobs. Which brings up the next question:

Roth or regular IRA?

This decision is mostly driven by tax rates:

  • With a regular IRA you pay tax in retirement on what you draw.
  • With a Roth IRA you pay taxes now on what you put away.

(In both cases, the appreciation and income accumulate tax-free.)

As an example, if you’re really raking it in now and plan a fairly low-budget retirement, then a regular IRA makes more sense, because the deduction happens at a high tax rate, but the monthly draw will be taxed at a lower rate. On the other hand, if you’re scraping by now (and pay a low tax rate), you have nothing to lose by picking a Roth IRA. If you strike it rich, your income from that will be tax-free; and if it’s as middling as you make now, you haven’t lost much. (Editor’s note: Roth IRAs have income limits, so check with the IRS to be sure you’re eligible to contribute.)

Because the critical variable is your tax rate, now and in the unknowable future, it’s worth the money to pay an adviser to look at the variables of your personal situation and get some informed and professional advice.

General questions

What about diversification? Someone asked me if he should leave his multiple 401(k) plans in place to diversify away his risk.

In a word, no. There are many ways to diversify within a single IRA. What is more diversified than an S&P 500 index fund, for example? So you can have all your money in one place, easy to manage, while your investments are highly diversified.

What about real estate? Good question. Rental property doesn’t grow tax-free like an IRA or 401(k) fund, but it has the potential to be more lucrative. However, it’s not nearly as passive an investment. You have to get tenants, keep up with maintenance, and deal with late payers and those who destroy the property. It does have the advantage, though, of probably being much more inflation-proof than paper investments.

Retirement (however you view or define it) is as profound a life change as leaving home, marrying, or having kids. And it has as many opportunities to screw it up. Fortunately, though, you have more notice and more time to prepare.

The trick is to make use of that time. What are you doing?