Your federal retirement strategy differs from that of most private sector employees. Because much of your retirement income is fixed or relatively predictable (FERS, Social Security, and TSP), how you place the rest of your investments matters just as much as what you invest in. This is the core of what is known as asset location.
Why Asset Location Might Matter More Than Allocation
Many federal retirement plans focus on asset allocation: how much to hold in stocks, bonds, and cash. But studies and advisers suggest that asset location, choosing which account (taxable brokerage, tax‑deferred like the TSP/traditional IRA, or tax‑free like the Roth option) to hold each type of investment in, can be an even bigger driver of your after‑tax retirement income. By optimizing where you hold your other investments, you can reduce tax drag, preserve more of your savings, and give yourself greater withdrawal flexibility.
Matching Assets to Account Types
Here’s how you might think about matching your assets to account types:
- Tax‑deferred accounts (TSP traditional, traditional IRAs): Good for slower-growing investments like bonds. You’ll pay ordinary income tax when you withdraw, but since you already have a pension and Social Security, this can help manage your overall taxes in retirement.
- Taxable accounts: Best for investments that grow steadily over time, like stocks you plan to hold for many years. Taxes on long-term gains and dividends are usually lower than regular income taxes.
- Tax-free accounts (Roth TSP, Roth IRAs): Great for fast-growing investments. Withdrawals are tax-free, so you can create a tax-free layer of income on top of your pension and Social Security.
Practical Steps for Federal Employees
- Take stock of your accounts – List your TSP (traditional vs. Roth), any IRAs/brackets, and any taxable brokerage accounts.
- Classify your assets – Identify which portions of your portfolio are tax‑inefficient (e.g., interest‑yielding bond funds) vs. tax‑efficient (e.g., broad index funds) vs. high‑growth.
- Assign assets thoughtfully – Place less tax‑efficient assets in tax‑advantaged accounts (TSP/traditional), move tax‑efficient assets into taxable, and allocate high‑growth assets into Roths if you have the space.
- Plan your withdrawals – In retirement, decide which accounts to draw from when, to optimize taxes and preserve flexibility.
- Revisit periodically – As you approach retirement, your time horizon and tax profile change; revisit asset location and make adjustments.
Your federal retirement isn’t just about how much you’ve saved; it’s about how smartly you’ve placed what you’ve saved. To learn more about asset location, reach out to a Federal Retirement Consultant (FRC®) who understands your unique federal retirement benefits.
