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Michael Kitces: How Higher Yields Affect Asset Allocation and Retirement Planning

The financial planning expert discusses the equity risk premium, tax-efficient retirement drawdown, and where to stash cash in a higher-interest-rate era.

The Long View podcast with hosts Christine Benz and Jeff Ptak.

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Today on the podcast, we welcome back financial planning expert Michael Kitces. I recently had the chance to catch up with Michael to get his take on asset allocation, specifically whether higher yields should have an impact on where investors hold their money. Today’s podcast is a recording of that conversation. Michael is the head of planning strategy for Buckingham Strategic Wealth, co-founder of XY Planning Network and AdvicePay and is the chief financial planning nerd—and yes, that’s his real title—for the advisor education platform and the Nerd’s Eye View blog. You can follow him via Twitter @MichaelKitces or on LinkedIn.



XY Planning Network


Buckingham Strategic Wealth


Investing Safe Assets

Where Should Investors Stash Their Safe Money Today?” Video interview with Michael Kitces and Christine Benz,, April 19, 2023.

Kitces: Where to Park 3 Types of Client Cash,” by Dinah Wisenberg Brin,, April 20, 2023.

Client Cash Management: Why It’s Important, and the Next Generation of Technology to Make It Better,” by Ben Henry-Moreland,, Aug. 22, 2022.


Rising Yields, Asset Allocation, Retirement Withdrawals

How Rising Yields Should Affect Asset Allocation for Retirees, Preretirees,” Video interview with Michael Kitces and Christine Benz,, May 3, 2023.

The ‘Yield-Split’ Method of Asset Allocation to Improve Tax Efficiency of Index Funds,” by Chris Murray,, March 30, 2022.

Increasing Retirement Withdrawal Rates Through Asset Allocation,” by Michael Kitces and Wade Pfau,

8 Inflation Conversations for Financial Advisors to Have With Clients,” by Ben Henry-Moreland,, April 27, 2022.

Is Private Debt Worth Considering as an (Alternative) Asset Class in Client Portfolios?” by Larry Swedroe,, Jan. 18, 2023.

The Extraordinary Upside Potential of Sequence of Return Risk in Retirement,” by Michael Kitces,, Feb. 20, 2019.


Kitces: ‘The Model Has to Change Again,’” The Long View podcast,, June 5, 2019.

Michael Kitces: Does Portfolio Customization Pay Off?The Long View podcast,, Aug. 23, 2022.


(Please stay tuned for important disclosure information at the conclusion of this episode.)

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Benz: Today on the podcast, we welcome back financial planning guru and Michael Kitces. I recently had the chance to catch up with Michael to get his take on asset allocation, specifically whether higher yields should have an impact on where investors hold their money. Today’s podcast is a recording of that conversation. Michael is the head of planning strategy for Buckingham Strategic Wealth, co-founder of XY Planning Network and AdvicePay and is the chief financial planning nerd—and yes, that’s his real title—for the advisor education platform and the Nerd’s Eye View blog. You can follow him via Twitter @MichaelKitces or on LinkedIn.

Michael, thank you so much for being here.

Michael Kitces: Absolutely. My pleasure. Appreciate the opportunity.

Benz: We’re thrilled to have you here. I want to start by discussing what’s going on with safe assets. Investors have had a little bit of a scare over the past couple of weeks with the regional bank trouble. I’m wondering if you can share how you think about safe assets? It sounds like you silo them into a few different categories. Can you walk us through that?

Kitces: To me, just when we think about cash particularly, assuming this realm of we’re investors, but we have other dollars as well. There is a big bucket of lots of different places that cash can sit. I tend to think about this in three different groupings, because we do it a little bit differently depending on what it is. So, the first of what I think about is, I’ll call it frictional cash. This is the cash that typically sits in an investment account that often we need because we just need some small level of cash—maybe I’m taking ongoing retirement distribution, so I want literally have to celebrate something every single time I take a monthly distribution out for retirement. In the advisor world that might be for like the very small fee sweeps that we generate. That might be no more than 1% or 2% of our cash holdings.

But in the context of that kind of frictional cash layer, frankly there’s not a lot that we typically do with this. And in most investment platforms, this goes to some kind of cash sweep or money market funds to the extent it sweeps to a bank, unless you have a very, very large account, like a 1%, that’s sitting in cash to handle frictional distributions. We are not over FDIC limits. We may or may not get the best yield on a lot of cash sweeps. So, if I have to trade into something else, then it’s defeating the purpose of cash I really need available to fund my distributions. I find for most investors, whatever that very small amount of frictional cash is, it tends to just sit there; it is what it is. It’s usually protected by the core protections that are in place of FDIC coverage for sweeps or whatever is there. And there’s not a lot to do with it.

The second category is what I think of as investment cash. Cash in my investment account because I want to hold cash in my investment account. Some of us do that because we’re a little more active; We want the proverbial dry powder for future investment opportunities. Maybe we’re doing it because we simply want to be more conservatively invested and hold a cash allocation to buffer the volatility of markets. This cash I think of a little bit differently than the frictional cash. Frictional cash, usually the whole point is I need it to be available immediately. If I need to take a distribution today or tomorrow I need it to be available immediately. When we get out of that realm and into investment cash, we usually view it a little bit differently—I want to be able to deploy it for an investment opportunity, but I don’t need access to it to spend right away.

And because of that, what we see a lot of the time for investment cash is we don’t usually literally hold it in cash. Maybe we’ll trade into a money market fund. Maybe we’ll trade into an ultrashort-term Treasury fund and try to get a little bit more yield out of Treasuries. So, we can nominally call it cash position because it’s not invested into traditional stocks and bonds, but we treat it a little bit differently. We usually shop a little bit more for yield, but we’ll often do it within the investment account because this is dry investment powder. I do want to have it available to invest so we shop for yield a little bit differently.

Benz: And a municipal money market fund …

Kitces: Absolutely, if I’m higher income and I don’t necessarily want the federal tax scrape, I may go into the muni side, but very much to that point, I’m investing for the investment characteristics of the cash, but I need it in my investment account because I’m planning to do something else with it for investment purposes at some point in some future.

Benz: OK. So importantly, though, no FDIC protections necessarily then, right?

Kitces: Typically, no FDIC protections there. Now, that might be because I’m buying a Treasury fund and have the full faith and credit of the United States government instead. I typically still want to keep that very secure. The whole point is I’m not trying to take investment default risk, the way I would with say a corporate bond where I get paid a little bit more for the default risk. That’s my bond allocation, not my cash allocation. But investment cash that we hold in that account, often we’re not necessarily following an FDIC path. We’re following a what’s the safest, secure, most liquid investment I can buy in an investment realm, not a cash-banking realm.

Benz: Got it.

Kitces: The third channel that we see, I tend to call reserve cash. Money I’m building up for savings often this is short- to intermediate-term goals. These are weddings. These are house down payments and the like, where cash balances may be larger. I don’t just need this to fund my ongoing spending. I’m not necessarily going to invest it anytime soon, so I don’t necessarily put it in my investment account. These are the dollars that we often sit in bank accounts, and we shop for yield. We see a lot of investors that take this and say, I actually want to maximize yield, not because I’m trying to find which Treasury fund has the highest yield, it’s because I’m trying to find which bank—or probably these days which online bank—has the highest yield. We even see services starting to pop up, like MaxMyInterest, that will shop the yield for you across multiple banks. They’ll say, we’ll find the highest yield; you don’t even have to stay on top of it and move all the money around yourself.

So now this shows up a little bit differently because, particularly if I’m building a sizable balance, it is a bank, so things like FDIC and coverage matter. They may be larger accounts because if this is a big reserve I’m building up, really, really FDIC insurance might start to matter. Again, this is around where I find it interesting to look at some of the services like MaxMyInterest on the consumer side; advisors, we have tools like Flourish, Stonecastle that are building not only to say we’ll help you shop for the yields, but even we’ll help you spread the money across multiple banks. So, you don’t have to worry about $250,000 of FDIC coverage or 500 for your joint account. We’ll open multiple joint accounts for you at multiple banks and automatically spread the cash across multiple banks and manage the FDIC risk for you as a small layer for which they charge a small fee.

It’s a very different kind of realm than the frictional cash where I tend not to be worried about FDIC coverage because I’m well below any limits if it’s even being swept to a bank in the first place. It’s different than investment cash, where I’m shopping for yield, but I’m typically doing an investment interest and I’m just trying to find ultralow-risk liquid investment vehicles versus what am I doing with my reserve cash where I’m shopping for yield and, at least in today’s environment, maybe managing FDIC coverage.

Benz: That’s a great rundown and a great way to think of it. I just want to come back to your point about talking about that investment cash and your point that potentially just think about owning a Treasury fund there from a practical standpoint, very limited risk of default obviously versus …

Kitces: Particularly if we get very, very, short-term, we don’t even want to take interest-rate duration risk to the extent we can. So how short-term can we get the funds, because we’re just trying to get basically whatever the federal government is paying to park the cash for a very short period of time. But thanks to several Fed interest rates, that’s actually not a bad number right now compared with where it was for much of the past 10 years.

Benz: Right. So, comparing that, say, the federal money market, mutual fund, no FDIC protections relative to the bank FDIC-insured deposit, how should people size up the risks there and approach how to apportion their assets across those two silos?

Kitces: Well, the irony to me, if you want to get the grand scheme of things like, my Treasuries are backed by the full faith and credit of the United States government. Ultimately, if my government is going to default, if that’s the thing we’re worried about, the FDIC isn’t going to have a lot to say as well at that point. We’re all ultimately rolling up to the same government that’s allocating dollars. And so, yes, there are some nuances to the differences between how FDIC guarantees work versus just the outright credit default risk of a treasury. But I think of them very much in the same category. Ultimately, these are all things that are backed by the faith and credit of the government. You either believe the government is going to make good on its debts and not default or not. If you want to get it to it from a monetary end, the government has a lot of means to make sure it doesn’t default on its debts, including literally the ability to print money that can create inflation and other problems. But it does cut the default risk down, which is why we have the credit ratings and the reserve currency status that we do.

And so, when I look at it from that perspective, I really tend to think of these as very similar buckets in terms of the safety of the dollars. You do get a little bit of difference in the accessibility of the dollars. If I’m in a bond fund or bond ETF, I’ve got to trade in and out of it. Technically I’ve got a trade out of it and have the trade settled before I can move the dollars. It’s not a huge lag, but it means I can’t write a check against this account outright, the way I can in the banking system. But again, if I’m looking at this from an investment cash perspective, well, I’m not trying to write a check against it. I’m getting ready to invest it into whatever my next investment opportunity is because I’m holding it as part of my cash allocation inside of my investment account.

Benz: That’s a really helpful rundown. Wanted to talk about asset allocation at large. I think that many investors at this stage, especially where we have this relatively new phenomenon—newish phenomenon—of higher yields coming online. Investors are really thinking about, well, how should that affect my asset allocation if these higher safe yields are available? Does that mean I should allocate more to safe assets? I would like you to focus especially on folks who are closing in on retirement or are in retirement.

Kitces: At a high level, I would say from just a pure asset-allocation perspective, higher yields don’t necessarily change the picture just in and of themselves. And really that’s for two reasons. The first is at the end of the day it’s really not about just what, we’ll call it the stated yield, the coupon on the bond—it’s what my yield is after inflation. And the reality is my after inflation, my real returns on bonds, are not particularly much better now than they were several years ago. I’ve gone from almost no yield with almost no inflation to a whole bunch of yield with a whole bunch of inflation. We’ve moved a point or two relatively on where those are in comparison to each other, but it’s not so we can say, well I went from near zero to almost 5% on yields, look at how much more I’m making. It’s like, OK, but when we look at how much more inflation went up as well, we’re not really making much grounds here.

And when we think about that from a retiree perspective, that’s especially impactful because what that means is in terms of my ability to fund my retirement-spending goals and my future retirement-spending goals, I’m really not growing these dollars in any material way above and beyond inflation. I may, or I’m hopefully at least, keeping pace with inflation. But higher yields doesn’t mean I’m beating inflation more and able to fund my long-term goals any better. Because I’m growing my money as much as I’m growing how much my future goals are going to cost, because inflation is lifting up the expense.

The secondary reason why we don’t necessarily look at this as a material difference from an asset-allocation perspective for retirement is if you want to get to the pure economics of how stock returns tend to come about, there’s usually two core components. The first is there’s some risk-free rate that just exists in the marketplace—what I can get if I just park my money somewhere and have it do nothing. There’s a second layer on top of that is then, well, what do I actually get for taking some risk? We usually call this the risk premium. In the context of stocks, we call it the equity risk premium or the stock risk premium. And stock returns, we can generally breakdown to there’s some risk-free rates and there’s some equity premium that sits on top.

When interest rates were very low, the risk-free rate was very, very small and the equity risk premium sat on top. When we put a bigger interest rate on top, the equity risk premium still sits on top of it and so we might even get higher returns out of stocks because it’s sitting on top of a higher risk-free rate in the first place. But the relative difference—how much do my stocks tend to beat my bonds—isn’t necessarily materially different if the bond rate lifts higher, because they move in tandem: one stock stacked on top of each other. And so, when we think about this from an asset-allocation perspective—why do I hold some stocks and some bonds—it usually comes down to two reasons.

I own some stocks on top of some bonds because the stocks give me a risk premium that rewards me in the long run that I need to accumulate for my goals or fund my long-term goals or beat inflation to cover my long-term goals. So, I got some money there, and then unfortunately, coming with that, they’re volatile—they move up and down and sometimes I need money at what is not exactly the best time to sell it. So, I’ve got some bonds that serve as essentially the ballast that balances out the ship that wobbles around with the stocks. And if my stocks are my growth engine and my bonds are my ballast, and stocks generally are going to give the same equity risk premium whether the base bond rate is high or low, the balance of how much stocks and bonds I own doesn’t necessarily really shift all that much.

When we look at this from a pure asset-allocation perspective, I don’t necessarily think about stock bond mix as looking materially different in higher-yield environments versus lower-yield environments. I guess the small asterisk that I would put to that is: When you get down to the purest sense of bonds trying to serve as a ballast to stocks—and that becomes especially important when we’re in early retirement stages. We have the infamous sequence of return risks—what happens if I need to withdraw from my portfolio in the early years and stocks are down in the early years, and if I draw too much from stocks in the early years while they’re down, by the time the market recovery comes, I don’t have enough stocks left to participate fully in the recovery. And then I start running out of money or have to curtail my expenses in the later years.

The extent that the bonds are supposed to provide ballast, bonds that have more yield tend to provide more ballast. Really for two reasons: one, outright, if I’ve got more yield, at least I’m clipping a coupon to generate some return while I’m putting some money in bonds in case stocks go down. And secondarily, while we’ll see if it happens anytime soon, the higher rates are, the more room there is for rates to cut the next time, say bad stuff happens in markets and the economy, and rate cuts create bond-price increases and bond-price increases gives me even more ballast return out of the bonds. And so, when I look at it from that perspective, there is I think more opportunity for bonds to provide that ballast against sequence of return risk to the point that some of the research that we published in the past is that you can hold higher bond allocations early in retirement to help balance that out. I sometimes call it a bond tents.

We’re going to build an extra allocation of bonds in the early years of retirement. If you draw your allocation to bonds, it goes up in the first few years of retirement, then you spend down that extra bond reserve over the next few years of retirement, you get back to whatever your original balance portfolio was that you hold from that point forward. If we want to build a bond tent to protect against sequence of return risk in the early years, and bonds provide a little bit more of a buffer when yields are higher and there’s more room for price appreciation if rate cuts come, it functions as an even stronger ballast in the early years of retirement. So, I do view that as one plus to the environment of having a little bit more yield coming off of our bonds is that that function of bonds not necessarily to be the return driver—the return drivers at the end of the day is the stocks—but to be the balance when the returns in the stocks are not always coming when we wanted them to come. The bonds help a little bit more in this environment.

Benz: Right. So just to clarify though, Michael, you’re not saying within the bond universe, the higher-yielding bonds tend to be more ballast? So, you’re not saying credit-sensitive bonds, they’d be worse ballast, right?

Kitces: Correct. And actually, what we find from some of the research that we’ve done around withdrawals and sequence of return risk, the bonds that do the best work of protecting against the sequence of return risk, ironically, it’s the most boring, lousy-yielding bonds. They’re not there to drive the return. They’re there to be the thing that does well when everything else is going badly. So, if you envision an environment where there’s a horrible economic recession and companies are defaulting left and right and going out of business, which means stocks are cratering at this point. If you think full-on recessions we’ve had at various points—we get one or two every decade or so—when you think about those environments, what’s the worst thing that happens in the bond world? High-yield bonds get crushed; corporate bonds get slammed; and good old-fashioned, not terribly appealing, yielding government bonds, A) continue to crank along their yields, and B) are often the one segment of the bond world that even goes up when everything else is getting slammed in a recession. Because there’s often rate cuts that are occurring and the classic math of bond when rates are going down, prices go up and you get that appreciation.

So just remembering and bear in mind, the point of bonds in a retirement portfolio is not the return driver; it’s the diversifier for the return driver. And so, taking the risks on the bond side that you take on the equity side, which is buying companies that pay better returns in the hopes that the company does well and doesn’t do badly if you’re already taking that risk on the stock side, you don’t need to take it on the bond side—at least from a pure retirement management sequence of return risk perspective.

Benz: You referenced earlier on the role of inflation and all of this. And I’ve been hearing in some quarters, especially among academics, forget all the complicated in-retirement portfolios; just buy or build some sort of a ladder TIPS portfolio, Treasury Inflation-Protected Securities, and call it a day, basically. What’s your take on such a strategy? Setting aside that I don’t think most investors do this, but do you think it’s a good approach?

Kitces: I will admit I have some challenges with the ladder TIPS strategy in retirement. One, just practically speaking, at least for much of the past 20 years, that these strategies have been discussed real returns were so low, TIPS just literally didn’t pay that much. And so, to actually build what essentially is a retirement portfolio that gets no benefits from the equity risk premium, you have to generate all of your return from a fixed-income world—when fixed-income real returns were at or near zero, you would just need so much money to do that. That the irony is if you had a big enough nest egg to actually fully fund a ladder TIPS portfolio out that long, you may as well just buy a bunch of stocks to ride out the volatility. Because you would have so much money that your withdrawal rate might be down to 3% or 2%.

In which case, I can just ride this out with stocks; I don’t actually need the bonds. If real returns get high enough, I think it does get interesting and will be an area that we’ll be looking at from the analysis. And if you run some of these numbers, say back in the 1990s when real returns were much higher, you could get some ladder TIPS portfolios that were at least reasonably competitive to what you can build with traditional 4% rules. Although ironically even back then, nobody wanted to buy TIPS and do that with TIPS because they were getting 10%-plus returns out of stocks, which again is part of the point: Stock returns tend to stack on top of bond returns. And so, if TIP yields are great, stock returns tend to be powering all forward much better as well, because it just means the whole real return environment is higher.

The first challenge that I just tend to find in practice when we sit down and do the math on it, is the amount of money you would have to have to fully insulate a ladder TIPS portfolio for an entire retirement time horizon embeds such low real returns and takes your withdrawal rate so low that if you had enough money to do that, you would have enough money to ride out the stock risk.

Benz: OK.

Kitces: The second challenge that crops up around building ladder TIPS portfolios is simply the question: How long do you want to build the portfolio? You plan on being on this earth for 20 years or 25 years, or 30 years, or 35 years, or 40 years, because if you’re literally going to build a ladder bond portfolio where you spend each sleeve, there’s nothing left at the end. So, if you build a 30-year ladder bond portfolio and you’re alive in year 31, you’ve got a problem. Sometimes we can insure against that by saying well then I’m not going to put all the money in the ladder bond portfolio; I’m also going to hold some in equities. Well, cool, but then we’re really just building good old-fashioned diversified portfolio again that have bonds and stocks. We’re right back in that realm, because part of the nature of building retirement portfolios that have mixtures of stocks and bonds is just the fact that when stocks tend to yield more than bonds over long time periods, we don’t need as much of a nest egg to retire in the first place. Because literally the growth engine of the stocks means we don’t need as much money to be able to retire, and then the bonds smooth out the volatility of the stocks in case the returns don’t come in the desired order.

The bonds get us through the short-term time horizon. The stocks get us through long-term time horizon, and the combination of the two means hey, even if I end up living a little bit longer than I’d expected, most of the time stocks go up a lot more than they go down, particularly if we can ride out the sequence of return risk. And by the time we get to the out years the ironic effect of sequence of return risk is if you survive the early years, if bad things happen in the early years, good things tend to happen after that. And the returns that come in the later years means if you live longer than you expected, there’s money left over. If you live longer than you expected on a bond ladder, there’s nothing left at the end of the ladder.

So, it’s that combination of the factors that putting the whole portfolio into real returns that are relatively low with TIPS often means we need so much money, especially if we’re going to do this for 30-year time horizons, that if we really had enough money to do that, we would also have enough money to ride out the stock volatility in the first place. And coupled with, I always still have the risk that I’m going to outlive my TIPS ladder, or if I’m retiring younger, I literally can’t buy TIPS for as many years as I’m expecting to be in retirement. Which means I have to start putting some stocks back in there anyways, and once I do, then we’re really back to diversified portfolios again in the first place.

Benz: Getting back to diversified portfolios for people who don’t want to take that absolutist all-TIPS portfolio approach, but they want to have some inflation protection in the fixed-income piece of their portfolio. Do you have any thoughts on how to approach that “how much,” and also how much to be disappointed about how TIPS funds behaved in 2022, where we saw them really behaving more in sympathy with the bond market and interest rates than they were in expression of inflation protection? Maybe you can talk about how in fact investors should think about that.

Kitces: Again, I draw this back to relative to sequence of return risk and what are bonds versus our stocks are trying to do in the first place? My bonds aren’t necessarily there to be my return driver, or even to some extent my inflation hedge, because the reality is I can buy good old-fashioned short-term government bonds. While it’s not perfect from day to day and month to month, when I look back over the span of several months and even a year, what’s happened over the past year? Inflation went up, Fed raised rates because inflation went up, and all of my bond yields went up. So, even if I didn’t have TIPS to be indexed to inflation, if I go and actually look at what’s happened with short-term bond funds, my yield moved with inflation anyway; it’s actually still there. And so, from that perspective, it doesn’t have the guarantee of TIP literally indexed to inflation, but bond yields tend to move relatively in lockstep with inflation anyway, particularly if you get toward the shorter end of bonds. If you buy very long-term bonds, you’ve got some different dynamics.

The second thing that I tend to look back to when we think about it from this perspective is, if I’m concerned about inflation, I don’t only need to hedge inflation on the bond side of the portfolio, my stocks function is inflation-hedged. In today’s environment, some stocks are getting maybe some bad press around this. But the reality is, when inflation crops up, it generally means, almost literally means, the prices of things are going up. So, when I buy it, this is not good news. When I sell it, it is good news. So, we see companies that have record revenue that are generating record profits because when everything gets more expensive, more money flows from the top of the company. They got to pay their staff more, hopefully as well as inflation lifts wages. But if my prices go up, my revenue goes up and if my expenses go up in lockstep, I still end up with more profits at least moving up at the pace of inflation. And when we look back to other high-inflation environments like the 1970s we very much saw the same kind of pattern where the real return on stocks actually did a pretty reasonable job over time of keeping pace with inflation, volatile in the short term, as it always tends to be, but stocks overall did a pretty good job of keeping pace with inflation.

And so, when my return driver comes from stocks and my inflation hedging can already come from stocks, and my short-term bonds already tend to move at least reasonably in the neighborhood of where inflation is going—again, the Fed is not always in lockstep, it’s not always in perfect synergy. But when you look over any moderate period of time, interest rates tend to move with inflation up and down, because that’s just the Fed literally responding to inflation to try to keep it in the zone and try to keep it on their mandate. We don’t necessarily need TIPS to serve that function. So not that I’m necessarily negative on TIPS; I don’t want to bash the TIPS market or anything of the sort, but I do find a lot of investors seem to put a lot of faith in, like “this is the one thing that I can rely upon that will be my perfect hedge for inflation”—when, in part, as we’ve seen in the short term, bond prices at least can move for other factors besides just inflation.

So, you see some of the TIPS price, TIPS fund price volatility that we saw in 2022. And in the meantime, a whole bunch of other things actually end up moving in lockstep with inflation anyway, as we’ve seen with short-term interest rates and equities. And while we certainly want to make sure in the aggregate that something is able to track with this, I want to be careful about buying 30-year bonds that tend not to move with inflation, and they tend to respond to interest-rate sensitivity, or if they’re corporates, responding to economic sensitivity as well. But when I drill down to, do I need TIPS to keep pace with inflation? The answer is, it’s an answer, but it’s not the only answer to this. And frankly that’s why when I look back at decades of research that we’ve done around retirement spending and just decades of investors retiring, a whole lot of retirees have done fine through a whole lot of inflation environments, prior to TIPS having existed or without any material allocation in TIPS, and it’s gone fine. And when I drill back to why have investors without TIPS done so fine through a wide range of inflationary environments? The answer is because inflation actually gets reflected in a whole bunch of other parts of the portfolio as well, in a way that still moves us at least reasonably in tandem over time.

Benz: That’s a good way to think about it. And a really helpful overview of asset allocation where we are today. I’d like to talk about a related topic, which is asset location, where to hold different types of assets, assuming I have multiple account types. This was a topic that was hard to get excited about when yields were so low. It’s like, what difference does it make really if someone is getting a 1% yield or 2% yield on their bonds? But now that we are meaningfully higher with income—which of course is taxed at ordinary income tax rates—can you share some thoughts on that asset location question?

Kitces: Asset location to me, has gone through an interesting evolution over the past 20-odd years that there’s really been a growing focus on it. If we go back to the 1990s, we only made Roths in the late 1990s, and frankly, IRAs and 401(k)s were still in their early stages of gaining momentum. It’s really the past 20 years that we’ve seen much bigger IRA and 401(k) balances. We’ve gotten more ways to move money in and out of retirement accounts. The overall contribution limits have gotten bigger, so we’re able to get more dollars in there, and we got this third bucket of tax-free Roth, that the asset-location decision on the one hand has become more complex. And on the other hand, it means there’s actually just literally more dollars and more opportunity to do this well. I have more money and more buckets to choose from. More choices means more economic benefit if I get this right, and conversely, more economic harm if I get this wrong.

When I look at these asset-location decisions overall, the basic rule for this usually is pretty straightforward. Anything that’s ordinary income may as well go inside of an IRA because it’s going to be ordinary income no matter what—whether you draw it out of an IRA or it’s taxed in taxable account. But at least if you put it in an IRA, it’s tax-deferred and you can control the timing of when this gets recognized into the future, when you take withdrawal instead of today. And so that usually led to some kind of basic rule of thumb, like bonds that generate ordinary income go inside of the IRA, and stocks that generate capital gains, go in brokerage accounts so that you still get the capital gains treatment.

The problem with that though, and we published a lot of research around this back in the early 2010s when interest rates got so low coming off a financial crisis—down to near zero for a while and barely 2% on intermediate Treasuries. The yields got so low that the irony is, taking a low-yielding investment and putting it in a tax-deferred account doesn’t actually really do much for you. The difference between tax-deferred compounding growth versus not tax-deferred compounding growth on 2? It’s not actually that much different, there’s just not that much compounding that happens when the yield base is so low in the first place. Compounding is a very powerful thing in the long run, but compounding low numbers only compound so far; compounding big numbers compound at much bigger levels. And because of that, what we actually found in our research is that because the yields were so low and there was so little benefit to get tax-deferred compounding growth on bonds, it was often actually better to put stocks inside of the IRAs. Even though you might convert capital gains to ordinary income because you could get tax-deferred growth for very long time periods.

If I look practically from any investor’s portfolio, even those of us that tend to buy and hold, most people I know who are even buy-and-hold oriented, if I pull up their portfolio today, and I say, “This is really cool. Show me what you had in 1993.” It’s not the same. Investment markets were different. ETFs barely existed. We lived in a mutual fund world. You couldn’t even buy it on an online platform because that didn’t exist. Just the nature of markets themselves change and from time to time funds change, offerings change. And even if you take a very low turnover portfolio, like a 10% turnover portfolio—so we’re only changing investments once a decade, on average—if we actually look at how that adds up over 30-plus years, once-a-decade turnover still drags so much lost return over multi-decade time periods that we found for investors with a really long time horizons, it was still better to put the stocks inside the IRA. Give up the capital gains treatment to avoid the tax drag of even very low turnover, and to the extent you’ve got anything that’s a dividend yield, if you’re getting a portion of returns in dividends instead of capital appreciation, that’s essentially like forced turnover.

Benz: You have no control.

Kitces: You have no control. It is coming through. You are getting taxed on it, which means you are experiencing the tax drive that goes with it. Again, usually preferential qualified dividend rates, but it’s an annual tax drag that again gets a little more turbocharged inside of an IRA. And so, we found for investors with long time horizons, the yields on bonds were low enough that there was some value to putting stocks inside of IRAs and getting that tax-deferred compounding growth. Now, however, our investment realm starts to shift. Right now, we’re seeing bond yields are getting higher and suddenly the value of tax-deferred compounding growth when I might get five-plus looks very different than tax-deferred compounding growth when I was getting two.

And so, one of the things even that we’ve always done with clients within our firm is revisiting asset location on an ongoing basis. I think of this as you can make the priority list of what’s most important to put in the IRA. What’s most important to put into the brokerage account, and as your investment views or investment assumptions or just the investment environment changes, so too does the nature of the priority list. Maybe I’m more bullish on something and I think it’s really got a great return opportunity, so I’m pushing it out to the Roth and then it appreciates a lot and all of a sudden I’m not excited about it anymore and maybe I don’t necessarily want it in a Roth. Or in this case, maybe I was not so excited about putting my bonds in the IRA because it actually wasn’t worth much to get tax-deferred compounding growth; I may as well leave it in a brokerage account. If I’m tax-sensitive, I’ll just buy a muni bond to the brokerage account.

Now suddenly, as yields are higher, putting bonds inside of the IRA starts to look more appealing again. And so, the nature of asset location to me is it is actually something that is more dynamic than often we’ve given it credit for with the simple rule of thumb of bonds in the IRA, because they’re already ordinary income in stocks in the brokerage account because they’re already capital gains. The relative weightings of these investments means the optimal location as you’re adding new dollars can actually shift over time. That’s part of the nature of how this works.

Benz: The investors’ time horizon for each of those pools of money also seems important. I think as a matter of course, many households do keep their safe cash-type assets in a taxable account just so they can have access to those funds. Let’s talk about a related topic, which is in retirement you’ve got to figure out where you’re going for your cash on an annual basis. So how does that relate to what you’ve just talked about—asset location, the sequence with which I should pull from those various accounts. How should I think about that?

Kitces: We actually try to keep these a little bit separate in what I call the account-sequencing question, which is in what sequence do I want to drawdown my accounts and where am I holding the dollars across those accounts? Because the reality is investments are pretty fungible these days. If I need to get money from account A versus account B or move them around, I can move them around quite readily. One of the discussions often that we heard even when we had talked about in the past: What does it look like to put bonds in taxable accounts, because the yields are relatively low, so there wasn’t a lot of value of asset-location IRA and putting stocks in the IRA. And then the question we often get is: When interest rates rise, you’re going to want to switch them; how do you switch them? Well, it’s really easy.

I sell the bond fond from the taxable accounts, which if interest rates just rose, is actually harvesting a capital loss, that’s a good deal. I sell the bonds for our capital loss and tax savings in my brokerage account and I buy them in my IRA. I sell the stocks in my IRA, which of course is a tax-free event anyway, and I reinvest the bond proceeds in my brokerage account into my stocks that are now holding the stocks in the taxable account with a very new, very high basis because I just bought into them today. So, it’s not as hard as we sometimes make it out to be to move these around, particularly in a realm where a lot of these have zero-transaction costs aside from maybe a penny bid-ask spread to execute a trade in an ETF. It was a little bit different if I go back a number of years where just ticket charges and transaction charges were a lot higher. I had to be a little bit more careful about the fact that I might have to swap and transmute these across accounts.

In today’s environment, I find a lot of investors don’t give as much credit to how amazingly liquid investment accounts and markets actually are today. That even if you don’t have the dollars in the right account, you can move them back and forth quite readily. The second thing that we find happens in practice around this … So, when you get out of the asset-location side and you get more directly to this account-sequencing issue, in what order do we want to drawdown the accounts? This is another one I think has gone through an interesting evolution over the years that we’ve now had these—first, we had investment accounts, then we had IRAs and 401(k)s, then we had Roths. We have all these different choices now.

The early model of this was pretty simple and straightforward. You spent the brokerage account down first because you wanted your tax-deferred accounts to run. Get tax-deferred compounding growth as long as they could, and then eventually when you ran out of the dollars in the taxable accounts, you would go to these IRAs. The problem, though, and we see this routinely, unfortunately, with new clients that have come on board that have gone through this, they say, “The reason I’m hiring you is I’ve built up this pretty sizable IRA. I spent down my other investment accounts running my retirement. I’m in my mid-to-late-70s now. I’ve got a pretty sizable IRA. I’m getting killed on taxes, because either the RMDs are the money I need to live off of when this is my only source of dollars. It’s just a big withdrawal and it’s blasting me in the top tax brackets.” They say, “Is there anything you can do about it?”

And we say, “Absolutely yes. Not now. Now it’s too late.” But if you had called us 10 or 15 years ago, yes, because what we should have been doing along the way is actually tapping those IRA dollars along the way to fill the low tax brackets. We often see for a lot of investors that, I’m going to spend on the taxable account first, I’m going to let the IRA run. We go through our 60s, we’re like, this is awesome, my tax bill is near zero; I’ve got no IRA distributions, my Social Security hasn’t started yet. I’m being really efficient about the liquidations. I’m liquidating the high-basis stuff first. Heck, like my bonds were giving me relatively low yields for a lot of the past 10 years. Look at how tax-efficient I am. I’m in this super-low tax bracket and I’m paying basically nothing to Uncle Sam. We do a little victory dance.

And then that bucket runs out and suddenly we’re fully concentrated into an IRA bucket for a really big portion of the dollars. We’re blasting the high tax brackets and you can’t dodge them. So, we get this use-or-lose it opportunity with the lower tax buckets to fill them as best we can while we’ve got the opportunity to do so, so we don’t cluster all the dollars in the later years. Now we get a couple of choices about how we go about doing that in practice. One option is we simply start taking withdrawals from IRAs in the early years where we can fill the low tax brackets before the RMDs and the Social Security and the rest begins.

The second option is we could say no, I’m still going to draw from my taxable accounts first, but I’m going to do partial Roth conversions every year. Not the whole account; if I convert the whole account, I go straight into the big tax brackets now, but just a small dent every year repeated over three, five, 10-plus years sometimes, depending on when you retired and when you start your Social Security, gives you an opportunity to keep whittling down the accounts. So that by the time you run out of taxable account dollars, we’ve got this mixture of IRAs and Roths and now we can still say, well, I’m going to draw from the IRA for the low tax brackets. I’m going to top up my retirement spending with the Roth, and I can continue this process through the range of my retirement.

The significance of all of this is in practice, we can do this remarkably independent of our asset-location decisions, so I can set my account sequencing, which essentially comes down to what’s the tax bracket that I want to fill, and it varies by investors. For some of us, just if I can fill the 12 and not go above the 12, that’s a great deal. For some of us there’s just a little bit too much wealth in the aggregate. Once investors have, say like 1 million or few dollars saved up in that big nest egg, it’s pretty hard to stay in the 12% bracket for life. There’s enough income that gets generated and kicked off from some combination of interest, dividends, and capital gains that you start creeping in the higher brackets. We say great, let’s fill the 22% and 24% brackets, but we’ll avoid jumping into the 32% that follows. When we work with our very affluent clients, maybe anything that’s not the top 37% bracket would be great to fill, and we just go right up to 37% threshold.

What we fill too will vary by investor, but as I go through the process saying, I want to make sure I fill my low tax brackets to harvest IRA dollars and either spend them or Roth-convert them while I spend from taxable accounts, I can largely do that independent of where the assets are. If I’m Roth-converting, I can move the assets in kind. I can sell something out of the IRA and rebuy it in the Roth or vice versa, because none of these are taxable transactions and my transaction costs are very low. As you mentioned earlier, sometimes I can even buy and sell out of my IRAs and into my brokerage account. I can’t move the money across the line because that’s a contribution or withdrawal, but I can sell A over here and buy A over here while I sell B over here and buy B over here and just do two transactions that swap them.

And because of that, we find we can often make the asset-location decisions quite independently of how we’re drawing down accounts from a sequencing end, which in turn we can often make quite independently of even generating ongoing cash, because the reality for a lot of us at the end of the day, even if we’re in retirement and taking withdrawals, we might be withdrawing 4% of our portfolio—if you follow a 4%-rule framework, if you’ve got some Social Security kicking in or pensions or other sources, your portfolio withdrawal might even be less than that. And when I get down to the fact, I literally need a few percentage points out of my accounts, in practice, you often end out with a lot of choices about how you’re going to generate that. Sometimes, just sweeping my bond interest or dividends to cash might do most of it if I’ve got a sizable account.

Or maybe I need to do a small-sale transaction, but if they’re bonds, I can harvest losses; if they’re stocks, maybe I’ll harvest losses depending on what it is. Maybe I’ll just go down to the individual level and say, I’ve got a number of stocks in my brokerage accounts, I need to generate some cash, but I only need a few percentage points, so I’m just going to find whichever things have the highest cost basis and the smallest capital gains, and I’ll sell those down. And what we find in practice is if you do take a few minutes to drill into the accounts and say, OK, I really need my spending, but it is only a few percentage points of my overall portfolio. How am I going to generate this cash, between the fact that I’m often moving money out of an IRA anyway because I need to fill low tax brackets? So, either I can move it to the Roth, or if I need some dollars, I can just liquidate from the IRA and spend it. Or I’m drawing from brokerage accounts, but I’ve got cash, I’ve got interest, I’ve got dividend sweeps, I’ve got the ability to sell higher-basis investments in the first place.

We find in practice it’s really quite manageable to generate cash while optimizing asset location and optimizing account sequencing separately or indirectly where you find yes, at some point you will need to sell something from your brokerage account that is up and generates a capital gain. At some point that’s not avoidable, that’s just kind of how it works. Your only alternative at that point is don’t buy things that go up and it can save you all of your capital gains taxes. But that doesn’t actually end out better. We can defer, we can delay by being efficient about what we liquidate and how we draw it down, and how we handle interest and dividends and other cash flow sources. Yes, at some point you do get to the capital gains, but if you’ve drilled down everything and all that’s left is capital gains, that it probably literally means you already are so far ahead of the game from the years of tax efficiency that you had to get to this point that, yes, it’s a little bit of a comeuppance, when, the moment of taxes finally comes, but you’re already winning. It’s not bad to get to that moment. It just means you already won.

Benz: Well, Michael, this has been such a helpful discussion. We’ve covered a ton of ground. Thank you so much for being here.

Kitces: Absolutely my pleasure. Thank you.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

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Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at Until next time, thanks for joining us.

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