To add to the original question, I'm interested in thoughts on what worlds of bonds people use to assemble a portfolio. YMOYL recommended 100% treasury bonds. I'm thinking I should consider agency, corporate, and munis.
For me, it really depends on the current environment and what you think is going to happen next. Is the spread between corporates and treasuries in the historically high range or low range? Are recession warning signals going off or are we exiting a recession? Do you or the market foresee rate hikes or rate cuts? Are there corp/agency/muni bonds that are, in your opinion, underrated?
In the current environment,
the spread between corporates and treasuries is near 20 year lows, so investors are not being paid much extra for taking on the added default risk of corporate bonds. According to my broker's fixed income table, typical 5-year corporate bonds at AAA, AA, or A credit ratings are yielding less than 5%, when I could get a 5-year CD for 5.1%. So I'm having a hard time getting excited about most of these. The yields on muni bonds are too pitiful to compete with CDs for people in my tax bracket.
At this point I own a handful of corporate bonds on the rationale that they are under-rated. For example, some businesses have high leverage but very predictable cash flows. That leads to a low rating for a fairly safe bond. Examples I own include Omega Health Investors (senior care REIT), Energy Transfer Partners (pipelines), Viatris (generic drugs), and Sallie Mae (student loans). I've been watching these companies thrive for a decade and they've looked risky the whole time.
Since this is sequence of returns protection, I believe I'm going to need to hold them in non-sheltered accounts. What I mean by that, is that I'm trying to use this as an insurance policy that will generate sufficient cash to avoid having to sell into a down market in the first 5 years of retirement. Most of the cash generated will be return of capital. If I understand my taxes, small amounts of taxable interest are not a problem for people who do not have work income because that part will be cancelled out by the standard deduction.
I wouldn't necessarily assume that you have to keep all your bonds in taxable accounts.
In a Roth IRA you could (a) shelter the interest from taxes, and (b) withdraw your
contributions at any time. Withdraw of
earnings is different, and subject to
a 5-year rule. But if for example you deposit $7k to buy bonds and in 2 years your account is worth $7,250 when you run into an emergency or SORR scenario, just leave the $250 "earnings" in the account. I don't think leaving those earnings in the account dramatically reduces the utility of the Roth. You'd just have to keep up with your contribution basis.
On the flipside, there's not much downside to keeping bonds in taxable either. Yes, you'll pay taxes on your earnings of, what, 5% per year? Zeros or highly discounted bonds with low yields are a way around this, because the bulk of their gains occur at the end of a very long road (ETFs holding these assets, like ZROZ, pay dividends though and negate this benefit, so might as well buy bonds direct if minimizing taxes in a taxable account is your strategy.).
I like the idea of deeply-discounted treasuries originally issued in 2020-2021 for your taxable account, because in a typical SORR event they could appreciate a LOT and in the meantime they don't trigger a lot of taxes with coupon payments. Put your higher-yielding bonds in the Roth. When the SORR event comes, sell your taxable treasuries and offset the taxable gain with loss harvesting - also from your taxable account (so you have both treasuries and stocks in taxable, in preparation for this play.). Withdraw your remaining living expenses from your Roth
contributions, leaving the
earnings in the Roth account to avoid triggering the 10% penalty tax.
So in summary I wouldn't worry too much about the taxable vs. Roth question, because it probably makes sense to split your bonds across these accounts. I do recommend maxing out your Roth contributions each year, and of course I would not put your bond / e-fund in a traditional IRA where you can't get to it in a pinch. You can run little war games on a spreadsheet to figure out optimal target allocations within each type of account.
