Strategy - Rodgers & Associates
Strategy

What is the New Three-Legged Stool?

Most people have heard of diver­si­fi­cation as a tool to lower risk (Don’t put all your eggs in one basket). The concept of diver­si­fi­cation is to avoid concen­trating your assets in one failing or under-performing investment that could cause serious harm.

Rodgers & Associates does not limit diver­si­fi­cation to investing, we diversify to minimize taxes. Tax diver­si­fi­cation involves allocating invest­ments across accounts and invest­ments that are taxed differ­ently. We call our strategy the New Three-Legged Stool™ of tax-efficient retirement planning.

Illustration of a stool wtih three even legs
Properly diver­sified
invest­ments.
Illustration of a stool wtih three uneven legs falling over
Improperly diver­sified
invest­ments.

The three legs, explained.

Leg one

Taxable Accounts

Non-retirement investment accounts. Earnings in these accounts are generally taxable each year.

Leg two

Tax-Deferred Accounts

IRAs, 401(k)s, 403(b)s and most retirement accounts. Earnings in these accounts are generally deferred until later.

Leg three

Tax-Free Accounts

Roth IRAs, and Roth 401(k)s. Earnings in these accounts are generally tax-free when withdrawn.

The benefit of using this strategy is to reduce income taxes now and in the future.

It gives our clients flexible withdrawal options when they retire. This flexi­bility means they can adjust their source of income as the economy and tax laws change. Our advisers use this strategy for all phases of retirement.

During Phases 1, 2, and 3 they are calcu­lating the optimal amount of income to defer or save after-tax. Actively estimating taxable income each year helps us determine how funds should be saved.

We continue tax projec­tions in Phases 4 & 5 to determine the optimal way to withdraw funds from the three accounts.

A recent study1 found the most tax efficient withdrawal sequence could extend a retirement portfolio by seven and a half years longer than the least tax-efficient sequence.

The New Three-Legged Stool strategy is critical during the retirement journey for these three reasons:

Footnotes
  1. Retire Right: The Critical Impor­tance of Tax-Efficient Withdrawal Strategies to Portfolio Longevity, by William Reichen­stein, Ph.D.

wrightsville bridge over the susquehanna river

Let’s build an efficient plan.

Take the first step in simpli­fying your retirement.

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