The Cash Flow Clock: For Retirees - Book - Page 47
The Cash Flow Clock
investments in our portfolio with the highest risk should be in our Roth
accounts. The purpose of taking higher risk is to get higher return. We want
that higher return to be tax free.
Asset location is a powerful tax planning tool that seems to be rarely used by
most investors or even advisors. In many portfolios, risk allocation is the
only priority. This means that each account has a similar mix of stocks,
bonds, and mutual funds regardless of how the assets are taxed. This makes
absolutely no sense. By simply locating our highest risk assets in our Roth
accounts, the lowest risk in tax deferred accounts, and an appropriate mix in
our brokerage/non-qualified accounts, we can greatly improve the efficiency
of our portfolio.
The Cash Flow Clock helps us determine these tax planning and asset
location decisions. We may have the perfect tax strategy in place, one that
will reduce our tax liability for our lifetime and our estate. But if it does not
meet our cash flow needs, then it is worthless to us. Cash flow must be
considered first.
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