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Learning, Sharing, and Teaching => Investor Alley => Topic started by: babytuckoo on September 27, 2017, 09:05:58 PM

Title: Allocation of bonds/bond funds
Post by: babytuckoo on September 27, 2017, 09:05:58 PM

Iím hoping somebody could give me some insight on an allocation question that I keep going back and forth on. Iím 43 and hope to be FIRE at age 46. My bucket approach is to have 2 years worth of expenses saved as cash, then access the taxable account as needed and then access the retirement accounts. Iím not even sure I need to do a backdoor rollover as I may just wait til 59.5 to access the retirement accounts.

I understand the tax benefit of having bond holdings in retirement accounts.  However, given the longer time horizon I prefer to have the retirement accounts weighted more heavily towards a stock allocation. 

That said, most of my taxable account is currently in stock holdings as well.  I plan to add bond holdings (index bond fund) to my taxable account to even out the volatility, but this seems to go against the tax implication advice everyone seems to mention.  Am I the only one who seems to have this all backwards?

I would like to be more conservative with the funds I will be accessing sooner (taxable account).  Itís the timing of when I access each bucket that keeps tripping me up. Any thoughts on this relatively nice problem to have?
Title: Re: Allocation of bonds/bond funds
Post by: alexpkeaton on September 27, 2017, 10:34:14 PM
You could invest in muni bonds which are tax-exempt federally, and possibly in your state. Vanguard's muni mutual fund is VTEAX and the ETF equivalent is VTEB. They also have some state-specific funds if that's useful to you.
Title: Re: Allocation of bonds/bond funds
Post by: alexpkeaton on September 28, 2017, 09:10:11 PM
Yeah, I'd just add the value of muni bonds depends on your tax rate. If you FIRE and have very little income and therefore pay very low taxes, muni bonds probably aren't worth it. But, if you're paying, say, a 38% marginal rate, a 3% yield is worth effectively worth 4.1%. (Someone may want to check my math.)
Title: Re: Allocation of bonds/bond funds
Post by: Monkey Uncle on September 29, 2017, 04:58:27 AM
Hold all your bonds in the retirement account.  You'll have to sell stocks from your taxable account to fund living expenses.  Just pay attention to your overall asset allocation.  If your overall percentage of bonds gets too large, sell some bonds and use the proceeds to buy some stocks, all within your retirement account.  That way you'll stay within your target asset allocation without having the adverse tax consequences of holding bonds in the taxable account.

Personally, I would not just focus on muni bonds, because then your bond allocation suffers from a lack of diversification.