Hello Mustaches,
I am 24, currently in grad school, and trying to develop a savings plan that will lead me to early retirement. I have a Roth IRA and a taxable account, both with Vanguard, and have been maxing out the Roth and then throwing any additional savings into the taxable. This is my current asset allocation:
Roth
45% Vanguard 500 Index Fund (VFINX) - large caps
45% Vanguard Extended Market Index Fund (VEXMX) - small and medium caps
10% Vanguard Total Bond Market Fund (VBMFX) - U.S. bonds
Taxable
100% Vanguard Total Stock Market (VTSMX)
My goal is to have an asset allocation of 90/10 stocks/bonds across the entire portfolio for the time being. My question relates to how to achieve this AA. I currently only have VTSMX in the taxable account, since it is very tax efficient. By now I have read many, many sources that say that I should consider my portfolio as a whole and that I should buy bonds first in my Roth, and then use the taxable account to buy any remaining bonds needed to achieve my asset allocation. I have a couple of issues with this advice (or, perhaps, misunderstandings), which maybe you guys can help clear up for me:
1. Let's say I retire at 35 (purely hypothetical, given that I still earn peanuts as a grad student!). I will have to draw from my taxable account for nearly 25 years before I can start taking penalty-free withdrawals from my Roth. If the taxable account is invested mainly in stocks since I put as many bonds as possible in my Roth, then the money in the taxable account is at significant risk due to stock market volatility, no? Shouldn't I ensure that the money in the taxable account is guarded against undue risk by purchasing an adequate percentage of bonds in this account, too? Municipal bonds would even be federally tax exempt...
2. If Roth ends up being invested in 100% bonds or some other insane percentage, the money will grow very slowly, and possibly be inadequate for the golden years.
What is the correct way to think about this? If this question has been posted before, my apologies - please kindly just direct me to the link.
Long Live The Mustaches,
Evan