When Should You Start Thinking About Asset Location?

March 19, 2023

When should you worry about asset location? In this highlight, Brian and Bo discuss when it makes sense to start thinking about asset location and how you should approach it.

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Let’s move on to Forrest’s question. At what point do we start considering asset location? I’m 31, making 56k, and I’m saving about 35%. I’ve got under 100k in assets across my three buckets, so when should he start thinking about asset location?

Yeah, this is a really interesting question. I’ll make sure I got it. How old did he say before? Say he is 31, making 56k income, saving 35%, right, but he has under a hundred thousand dollars invested. Yes, so for those of you that don’t know, when he talks about asset location, you know, when we think about investing in portfolios, we think about our asset allocation, how do we spread out assets like how much do we have risk on, how much do we have risk off, what are the different classes we’re using? Well, then there’s another area that you can look at which is asset location, which means what types of accounts do I hold, what types of assets in. So do I want to hold inside of my Roth accounts, what I want to hold inside of my pre-tax accounts?

You’ve heard us say before that asset location is something that can be incredibly valuable and can add to your overall lifetime return on your portfolio if you’re doing it really, really well. But it sounds like Forrest is asking the question, when does it make sense for me to think about it? And our answer is pretty simple. Or I’ll say my answer, and Brian, I’ll be curious to hear what you say. I would say when your financial circumstance gets to the point where the marginal difference that it makes becomes substantial, to where it actually makes sense for you to focus on. I would argue someone who’s 31, still early on in the accumulation phase, still building up your portfolio, the really big thing that you should be focusing on more than anything else is your savings rate. How can I save? How can I begin throwing money at this portfolio? How can I start putting my dollars to work? And I wouldn’t get lost on all the other stuff like complicated asset allocation or looking at asset location. And then as your portfolio grows and it begins to reach critical mass, and you start getting 400,000, 500,000, 600,000 dollars of assets and you have a number of different account types, well then you can start saying, “Okay, now I don’t need just a generalized allocation like a Target retirement fund. I need a specialized allocation for me. And inside of that specialized allocation, I want to think about how do I locate the assets inside of there.” Once your portfolio hits a critical mass, those small changes that might make whether it’s a percent or a percent and a half or something like that can be material. Early on, I worry that it’s more of a distraction than really adding a lot of value to your long-term trajectory. Can you tell my New Year’s resolution is to be more concise? Because once again, I have three quick points on this.

Number one, I’m just going to give you the answer of when this typically happens is under the Food Structure, the Financial Order of Operations. I’m holding it up. Our deep dive is at learn.moneyguy.com. This is step number seven of the Financial Order of Operations. Hyper accumulation is where you worry about the three bucket strategy.

That’s number one under general terms, but let’s talk about your situation. Number two is tax situation. You said you make fifty-six thousand dollars, you’re 31 years of age. I’ve got to think that a lot of you know that at that level of income, you’re not in the highest tax bracket. So, Roth assets are going to make a lot of sense for you. Because the government restricts how much money you can put in those tax-free growing accounts, load it up as much as you can in those tax-free assets. Because you’re not only going to be able to do it in the Roth IRAs, you’re going to be able to do it in the Roth 401ks. Tax situation definitely has an impact, and that leads to number three.

You know how much do you want to expand on this, and when do you actually need these assets for your “why” now? If you’re 31, thinking you’re going to retire, because at a savings rate of 35 percent or greater, you might be thinking about leaving the workforce at age 55 or 60, well below when you should have the 59 and a half access. It might be on the table. The “why” might mean that yes, the Roth growth is important, but I do need to make sure I have some after-tax assets to be my bridge account to get me through those years that I’m either going to have to do 72t or to have some other unique structure so that I can actually have access to the savings that I’ve built over all these decades to bridge me to that 59 and a half or even 55. An employer workplace plan, pay attention to those things with your “why” and then you know, roll that with the Financial Order of Operations under number one and number two is obviously the tax situation.



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