Most federal employees approaching retirement spend the bulk of their financial conversations focused on asset allocation.
They debate how much they should have in stocks versus bonds. They adjust models, update their TSP investment mix, or consult retirement seminars that emphasize diversification. But very few pay attention to where their assets are held.
And this is where much of the avoidable loss in retirement planning happens.
In a world where federal income streams are largely inflexible, such as pensions and Social Security, tax optimization and asset placement can drive more value than fine-tuning an allocation model ever will.
If you want to preserve more of what you have built, build flexibility into your retirement income, and reduce tax drag, asset location is where the conversation needs to go.
Why Federal Professionals Are Structurally Different
Federal employees do not retire like the average worker in the private sector. The structure of their income in retirement is different, and it is this structure that makes asset location more important.
Federal pensions create a guaranteed income stream. For many, that stream covers a significant portion of their baseline living expenses. Social Security, layered on top, provides another fixed income source.
Add to that required minimum distributions from TSP and other traditional retirement accounts, and you quickly see that a large portion of a federal retiree’s income will be taxed at ordinary income rates whether they want it or not.
This income profile leaves federal retirees with less flexibility in how they draw funds. They already have a floor of taxable income. The more tax-inefficient their investment withdrawals are, the less control they retain over their tax situation.
This is why asset location matters even more for this community. You do not have complete freedom in deciding when and how to withdraw pension and Social Security income. But you do have control over how your remaining portfolio contributes to your tax picture.
The Common Mistake: Ignoring Asset Location
Most federal professionals optimize their asset allocation. They decide on a model, perhaps 60 percent stocks, 40 percent bonds, and then spread it across their accounts.
But they often fail to consider where those assets sit. Bonds inside taxable brokerage accounts. Actively managed mutual funds with high turnover sitting outside of tax-advantaged accounts. TSP allocations that do not reflect the broader portfolio.
These decisions may seem small. Over time, they are not. They can create a steady stream of avoidable taxes, compounding quietly year after year. In a career where many professionals already retire with seven figures or more saved, even modest improvements in tax efficiency can translate into six figures of additional spendable wealth.
What Asset Location Is, and Why It Matters
Asset location is the simple idea that it is not just about what you invest in, but where you hold those investments.
Tax-inefficient assets belong in tax-advantaged accounts. Tax-efficient assets can safely sit in taxable accounts. It sounds obvious, but it is rarely applied systematically.
For example, bonds generate interest that is taxed at ordinary income rates. This income is better sheltered inside TSPs or traditional IRAs. High-turnover mutual funds also belong inside tax-deferred accounts whenever possible.
On the other hand, long-term equity index funds are tax-efficient. They can often sit comfortably inside taxable accounts with minimal annual tax impact. Highly appreciated equities may even benefit from stepped-up cost basis treatment if held to death, another consideration that taxable placement can support.
Roth accounts, with their tax-free growth, are a powerful location for high-growth assets with long-time horizons.
Applying these principles is not about chasing tax tricks. It is about respecting the fact that taxes are one of the largest headwinds retirees face. In the federal context, where pensions and RMDs already create taxable income, reducing the friction on portfolio withdrawals becomes even more valuable.
Why It Matters More Than Allocation in the Federal Context
For federal employees, the conventional wisdom around allocation can miss the bigger picture.
Pension income and Social Security already represent a fixed income stream, functioning in many ways like bond exposure. This reality often makes portfolios more conservative than they appear on paper.
Overemphasizing bonds inside investment accounts can therefore compound this conservatism and unnecessarily increase taxable income. At the same time, failing to consider the tax treatment of portfolio withdrawals can create surprises that diminish flexibility.
Asset location gives retirees tools to manage their tax bracket in retirement more actively. It allows them to control how additional income layers on top of their pension and Social Security streams.
In practical terms, this often means holding bonds and other income-producing assets in TSP and traditional IRA accounts, allocating long-term equities strategically across Roth and taxable accounts, and thinking carefully about withdrawal sequencing, not just withdrawal rates.
How to Think About Building an Efficient Portfolio
Building a well-located portfolio requires discipline but not complexity.
The goal is to match asset type to account type thoughtfully. Taxable bonds and income-producing investments in TSP or traditional IRAs. High-growth equities and long-term positions in Roth accounts. Tax-efficient equity funds in taxable accounts, where low turnover helps minimize drag.
This does not require exotic products or strategies. It requires intentional design and a willingness to revisit placement as both markets and personal circumstances evolve.
Withdrawal planning also plays a role. In retirement, blending withdrawals from taxable, traditional, and Roth accounts allows retirees to manage their tax exposure dynamically. The more flexibility you have built through asset location, the more options you retain.
The Psychological Advantage
Taxes are often a source of anxiety for retirees. Federal professionals in particular, who have limited flexibility on their pension and Social Security income, can feel trapped by rigid tax outcomes.
Good asset location planning reduces this stress. It creates an environment where retirees can choose how to draw additional income in a way that supports both their financial and emotional needs.
When you know that you can draw from different buckets without triggering avoidable taxes, you have more freedom to live on your terms.
And freedom, not just financial accumulation, is what most retirees truly value.
Conclusion: Shift the Conversation
Federal professionals spend too much time worrying about allocation and too little time optimizing location.
This is not about abandoning diversification. It is about adding a layer of intelligence to how you implement it.
A well-located portfolio does not just preserve wealth. It supports better retirement outcomes, reduces tax friction, and gives federal retirees more flexibility in how they live the next phase of their lives.
It is one of the rare financial strategies that rewards both logic and discipline. And for those willing to think beyond conventional advice, it offers a powerful edge.
Johnny Medina is Managing Partner at Nhabla, a fiduciary wealth firm serving physicians, federal executives, and other mission-driven professionals. He serves as Portfolio Manager for the firm’s investment strategies and holds a Master of Science in Finance from Johns Hopkins University.
