Bond conundrum: looking for recommendations

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waywardguy
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Bond conundrum: looking for recommendations

Post by waywardguy » Mon Feb 12, 2018 9:14 pm

I have a low 7-figure portfolio and I'm 53. I've got about 55% in domestic and international equities (funds, ETF's), about 42% in cash and the remainder in REIT's and bonds. An age-10 bond allocation would put me at 43% bonds - so a 'simple' solution would say, take your cash and buy bonds. A couple of other salient points:

1) about 70% of my portfolio is in after tax accounts, 30% in Rollover IRA and 401k;
2) generally, bonds would be better to hold in tax deferred accounts and low turnover/equity ETF's/funds in after tax accounts

The part I'm struggling with:

A) with about 70% of my portfolio after tax, I can't get to 43% bonds unless I max out my 401k/Rollover IRA with all bonds, then buy more bonds with after tax accounts.
B) My goal is to retire around 60-62 and live off after tax accounts and defer SS until age 70. That would lead me to think that, with a longer horizon before needing to draw proceeds from tax-deferred accounts, I can better tolerate risk (equities) in my 401k/Rollover IRA;
C) where then, should I leverage bonds?:
  • buy equities in 401k/Rollover IRA and invest in muni-bond funds in after tax accounts?
  • buy corporates and govt bonds in after tax accounts and don't let the tax tail wag the portfolio dog?
  • Forego bonds (given rising rates - at least for now) and invest in CD ladder?
  • something else?
Appreciate any thoughtful advice my BH brethren may share... Thx in advance!

livesoft
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Re: Bond conundrum: looking for recommendations

Post by livesoft » Mon Feb 12, 2018 9:15 pm

What I would suggest depends on your marginal income tax brackets state and federal.
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waywardguy
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Re: Bond conundrum: looking for recommendations

Post by waywardguy » Mon Feb 12, 2018 9:45 pm

livesoft wrote:
Mon Feb 12, 2018 9:15 pm
What I would suggest depends on your marginal income tax brackets state and federal.
Thx livesoft, should have included that. Fed: 33%, state (MA): 5.1%

livesoft
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Re: Bond conundrum: looking for recommendations

Post by livesoft » Mon Feb 12, 2018 9:52 pm

With that info, I would put 100% bonds in 401(k) and rollover IRA. Then only a little bond funds in taxable as tax-exempt muni for MA. My AA would be about 65% equities which all fit in taxable.

I would not have REITs at all (apologies to @staythecourse).
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MotoTrojan
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Re: Bond conundrum: looking for recommendations

Post by MotoTrojan » Mon Feb 12, 2018 9:58 pm

If you implement livesoft's plan (looks sound) don't forget that you can still sell equities from your taxable account (which will be mostly comprised of them) without having to reduce your equity exposure; ie. you can sell equities from taxable, but have the net effect be a sale of bonds, by simply exchanging bonds in your 401k for equity funds (with no tax consequences). Always best to think of the portfolio as one pot in my opinion, and then determine a global AA to get you through your various stages.

waywardguy
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Re: Bond conundrum: looking for recommendations

Post by waywardguy » Mon May 21, 2018 1:34 pm

livesoft wrote:
Mon Feb 12, 2018 9:52 pm
With that info, I would put 100% bonds in 401(k) and rollover IRA. Then only a little bond funds in taxable as tax-exempt muni for MA. My AA would be about 65% equities which all fit in taxable.

I would not have REITs at all (apologies to @staythecourse).
Thx livesoft, appreciate your insights as always. And apologies for the delay here - my bad for not reaching back out sooner. I wonder if you could clarify a bit further if you happen to see this? I'm struggling with that to do here:

Now 54, my intermediate term goal is to semi-retire (still work, but out of 'rat-race' job) by 60-62 years of age (6-8 years). Given the long bull market and the increasing likelihood of a recession in the next two years - coupled with my asset distribution (70% after tax, 30% pre-tax) and my goal of utilizing after tax accounts to fund my early retirement years (and leave pre-tax distributions until later), my feeling is that I"m better off keeping equity index funds in pre-tax accounts. Longer horizon before I need them; ability to ride out short/intermediate term market downturns, etc. I recognize that bonds, generally-speaking because of the typical tax implications, should be held in pre-tax accounts, but in my personal situation my feeling was to keep equities in pre-tax and keep safer/less volatile assets in after tax accounts which I would plan to tap sooner. And given the tax implications of corporates/treasuries, my thought was to use munis in after tax to reduce tax impact while still introducing ballast overall. Thoughts?

I have also considered taking that roughly 42% cash position and splitting it 50/50 (muni-bonds,CD-ladder), with the muni-band portion being split between national and MA muni bond fund.

Thx again.

livesoft
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Re: Bond conundrum: looking for recommendations

Post by livesoft » Mon May 21, 2018 5:19 pm

waywardguy wrote:
Mon May 21, 2018 1:34 pm
Longer horizon before I need them; ability to ride out short/intermediate term market downturns, etc. I recognize that bonds, generally-speaking because of the typical tax implications, should be held in pre-tax accounts, but in my personal situation my feeling was to keep equities in pre-tax and keep safer/less volatile assets in after tax accounts which I would plan to tap sooner. And given the tax implications of corporates/treasuries, my thought was to use munis in after tax to reduce tax impact while still introducing ballast overall. Thoughts?
I think your feelings are fooling you. Forget about feelings If you have 100% equities in taxable and sell them to fund early retirement, then you would simply exchange from bonds to equities in your tax-advantaged account (you call it "pre-tax") to get you asset allocation back to your desired numbers.

In essence, you would be placing cash needs in tax-advantaged accounts as described in the Bogleheads wiki:
https://www.bogleheads.org/wiki/Placing ... ed_account
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aristotelian
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Re: Bond conundrum: looking for recommendations

Post by aristotelian » Mon May 21, 2018 5:40 pm

You don't want equities pretax because the growth will be taxed at your marginal rate! Convert the pretax accounts to bonds and CDs, and supplement with Munis in your taxable account.

jalbert
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Re: Bond conundrum: looking for recommendations

Post by jalbert » Mon May 21, 2018 5:46 pm

livesoft wrote:
Mon Feb 12, 2018 9:52 pm
With that info, I would put 100% bonds in 401(k) and rollover IRA. Then only a little bond funds in taxable as tax-exempt muni for MA. My AA would be about 65% equities which all fit in taxable.

I would not have REITs at all (apologies to @staythecourse).
Would suggest a slight tweak— additionally purchase I-bonds in taxable space each year.
Risk is not a guarantor of return.

dbr
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Re: Bond conundrum: looking for recommendations

Post by dbr » Mon May 21, 2018 6:55 pm

jalbert wrote:
Mon May 21, 2018 5:46 pm
livesoft wrote:
Mon Feb 12, 2018 9:52 pm
With that info, I would put 100% bonds in 401(k) and rollover IRA. Then only a little bond funds in taxable as tax-exempt muni for MA. My AA would be about 65% equities which all fit in taxable.

I would not have REITs at all (apologies to @staythecourse).
Would suggest a slight tweak— additionally purchase I-bonds in taxable space each year.
Yes, effectiveness depends on if you are married (twice the purchase limit) and how much money is involved (purchase limit is $10k/year).

waywardguy
Posts: 30
Joined: Sat Feb 03, 2018 12:36 pm

Re: Bond conundrum: looking for recommendations

Post by waywardguy » Tue May 22, 2018 10:29 pm

livesoft wrote:
Mon May 21, 2018 5:19 pm
waywardguy wrote:
Mon May 21, 2018 1:34 pm
Longer horizon before I need them; ability to ride out short/intermediate term market downturns, etc. I recognize that bonds, generally-speaking because of the typical tax implications, should be held in pre-tax accounts, but in my personal situation my feeling was to keep equities in pre-tax and keep safer/less volatile assets in after tax accounts which I would plan to tap sooner. And given the tax implications of corporates/treasuries, my thought was to use munis in after tax to reduce tax impact while still introducing ballast overall. Thoughts?
I think your feelings are fooling you. Forget about feelings If you have 100% equities in taxable and sell them to fund early retirement, then you would simply exchange from bonds to equities in your tax-advantaged account (you call it "pre-tax") to get you asset allocation back to your desired numbers.

In essence, you would be placing cash needs in tax-advantaged accounts as described in the Bogleheads wiki:
https://www.bogleheads.org/wiki/Placing ... ed_account
Thx livesoft, I think I understand what you're saying here. At first I was puzzled: in my case, I'm stating that I would withdraw from taxable during early retirement years (i.e. before SS - hopefully age 70 - and before RMD's on tax-advantaged accounts). At first blush my thought was: what if the markets experience a downdraft right at the outset of my retirement - my taxable account (from which I would be withdrawing to fund retirement) could be much reduced in value at the worst possible time. But in the scenario you describe, my AA is the same overall: so I would just use tax advantaged dollars (bonds) to buy discounted equities (at that point) to replace the discounted equities that I just needed to sell. (pls correct me if I"m misstating this - and I apologize for not 'getting' this at first!) :oops:

The other element here is considering to what degree I'm in equities as I approach my early retirement age. Jane Bryant Quinn argues a 'bucket' strategy (keep 4-5 years worth of living expense in safe bucket and the balance in equities) or, from the Kitces/sequence risk piece I read awhile back, start with 30% in equities at retirement (when you can least afford a big market pullback) and slowly increase that to 70% (by end of life), which provides the best chance to fund a 35-year retirement. But in either case, whichever idea one subscribes to, I think you're saying the net-result is the same: put your equities (at whatever level you're comfortable) in taxable accounts and keep bonds, CD's, etc. in tax-advantaged.

Thx as always to the kind BH members who take their time to educate the masses to make smart decisions! :beer

waywardguy
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Re: Bond conundrum: looking for recommendations

Post by waywardguy » Tue May 22, 2018 10:36 pm

aristotelian wrote:
Mon May 21, 2018 5:40 pm
You don't want equities pretax because the growth will be taxed at your marginal rate! Convert the pretax accounts to bonds and CDs, and supplement with Munis in your taxable account.
Thx aristotle, not sure if the terms I'm using are the clearest. By pre-tax I mean tax-advantaged. I hear what livesoft was saying in his post - tax efficient equities make the most sense in taxable accounts. In any case, tax-advantaged accounts will grow tax free until I start taking distribution (or am required to at 70 1/2), so how those tax advantaged accounts 'grow' (bonds, dividends, equity growth, etc.) is immaterial until I start taking distribution, right?

I expect/hope that in the years between my hoped-for early retirement (early 60's) and age 70 I can convert 401K/rollover IRA balances slowly to Roth's (depending on tax rates during those years), in order to avoid a potentially significant tax increase if I left the tax advantaged accounts as is and start taking distribution on tax advantaged accounts at age 70.5

waywardguy
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Joined: Sat Feb 03, 2018 12:36 pm

Re: Bond conundrum: looking for recommendations

Post by waywardguy » Tue May 22, 2018 10:40 pm

dbr wrote:
Mon May 21, 2018 6:55 pm
jalbert wrote:
Mon May 21, 2018 5:46 pm
livesoft wrote:
Mon Feb 12, 2018 9:52 pm
With that info, I would put 100% bonds in 401(k) and rollover IRA. Then only a little bond funds in taxable as tax-exempt muni for MA. My AA would be about 65% equities which all fit in taxable.

I would not have REITs at all (apologies to @staythecourse).
Would suggest a slight tweak— additionally purchase I-bonds in taxable space each year.
Yes, effectiveness depends on if you are married (twice the purchase limit) and how much money is involved (purchase limit is $10k/year).
Thx dbr and jalbert. Why buy I-bonds in taxable though, aren't they taxed as ordinary income (federal)?

Slow FIRE
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Re: Bond conundrum: looking for recommendations

Post by Slow FIRE » Tue May 22, 2018 10:59 pm

I-bonds are taxed when you redeem them. So in some sense they are like a tax advantage account, but without the age requirement.

livesoft
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Re: Bond conundrum: looking for recommendations

Post by livesoft » Wed May 23, 2018 6:13 am

waywardguy wrote:
Tue May 22, 2018 10:29 pm
[...]
(pls correct me if I"m misstating this - and I apologize for not 'getting' this at first!) :oops:
[...]
But in either case, whichever idea one subscribes to, I think you're saying the net-result is the same: put your equities (at whatever level you're comfortable) in taxable accounts and keep bonds, CD's, etc. in tax-advantaged.
You got it.

But I will add for other readers that one will have equities AND fixed income in tax-advantaged. That is put equities in taxable AND equities and bonds in tax-advantaged. For some folks, they will fill tax-advantaged with bonds and yet they will want more bonds, so bonds will have to spill over into taxable. Another nuance is that folks will tend to have tax-deferred with bonds, but Roths with equities.
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dbr
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Re: Bond conundrum: looking for recommendations

Post by dbr » Wed May 23, 2018 8:17 am

waywardguy wrote:
Tue May 22, 2018 10:40 pm
dbr wrote:
Mon May 21, 2018 6:55 pm
jalbert wrote:
Mon May 21, 2018 5:46 pm
livesoft wrote:
Mon Feb 12, 2018 9:52 pm
With that info, I would put 100% bonds in 401(k) and rollover IRA. Then only a little bond funds in taxable as tax-exempt muni for MA. My AA would be about 65% equities which all fit in taxable.

I would not have REITs at all (apologies to @staythecourse).
Would suggest a slight tweak— additionally purchase I-bonds in taxable space each year.
Yes, effectiveness depends on if you are married (twice the purchase limit) and how much money is involved (purchase limit is $10k/year).
Thx dbr and jalbert. Why buy I-bonds in taxable though, aren't they taxed as ordinary income (federal)?
The tax is deferred for30 years or until you redeem the bonds. The function is the same as an after tax contribution to a 401k. It just gives you a little more opportunity for tax management.

aristotelian
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Re: Bond conundrum: looking for recommendations

Post by aristotelian » Wed May 23, 2018 2:04 pm

waywardguy wrote:
Tue May 22, 2018 10:36 pm
aristotelian wrote:
Mon May 21, 2018 5:40 pm
You don't want equities pretax because the growth will be taxed at your marginal rate! Convert the pretax accounts to bonds and CDs, and supplement with Munis in your taxable account.
Thx aristotle, not sure if the terms I'm using are the clearest. By pre-tax I mean tax-advantaged. I hear what livesoft was saying in his post - tax efficient equities make the most sense in taxable accounts. In any case, tax-advantaged accounts will grow tax free until I start taking distribution (or am required to at 70 1/2), so how those tax advantaged accounts 'grow' (bonds, dividends, equity growth, etc.) is immaterial until I start taking distribution, right?

I expect/hope that in the years between my hoped-for early retirement (early 60's) and age 70 I can convert 401K/rollover IRA balances slowly to Roth's (depending on tax rates during those years), in order to avoid a potentially significant tax increase if I left the tax advantaged accounts as is and start taking distribution on tax advantaged accounts at age 70.5
The distribution between Roth and traditional definitely matters. If you go stock-heavy in their 401k, you risk ending up with millions of dollars in the 401k, which will all be subject to tax. If you work up until claiming social security, you then have to pay tax on much of that money at a high rate, which defeats the purpose of deferring taxes. With 401k, you are not only trying to defer taxes until later but also pay *less* tax on the same amount of money.

One way to minimize that risk is take full advantage of Roth and put your assets with the higher expected return (stocks) in Roth and slower growing assets (bonds) in traditional/401k. Of course it is fine to hold stocks in your 401k if you don't have enough space in your Roth, but if you concentrate bonds in your 401k, you can limit the growth in the 401k. The net result is the same amount of money invested with the same allocation between stocks and bonds, but less tax to pay at the end.

pkcrafter
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Re: Bond conundrum: looking for recommendations

Post by pkcrafter » Wed May 23, 2018 2:16 pm

Not what you asked about, but your AA is not 55/45 since REITS are stocks, and volatile ones at that. Add the REIT holdings to the equity side.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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grabiner
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Re: Bond conundrum: looking for recommendations

Post by grabiner » Wed May 23, 2018 7:20 pm

waywardguy wrote:
Mon Feb 12, 2018 9:14 pm

B) My goal is to retire around 60-62 and live off after tax accounts and defer SS until age 70. That would lead me to think that, with a longer horizon before needing to draw proceeds from tax-deferred accounts, I can better tolerate risk (equities) in my 401k/Rollover IRA;
This does not matter, because you can reallocate freely; the risk affects you the same way. If you want to withdraw from your taxable account and sell bonds, but your taxable account is all stock, then you can sell stock in your taxable account, and move an equal amount from bonds to stock in your 401(k). Wherever the stock is, the effect on your retirement of a decline in the stock market depends only on how much stock you have.
Wiki David Grabiner

waywardguy
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Re: Bond conundrum: looking for recommendations

Post by waywardguy » Tue May 29, 2018 1:14 pm

livesoft wrote:
Wed May 23, 2018 6:13 am
waywardguy wrote:
Tue May 22, 2018 10:29 pm
[...]
(pls correct me if I"m misstating this - and I apologize for not 'getting' this at first!) :oops:
[...]
But in either case, whichever idea one subscribes to, I think you're saying the net-result is the same: put your equities (at whatever level you're comfortable) in taxable accounts and keep bonds, CD's, etc. in tax-advantaged.
You got it.

But I will add for other readers that one will have equities AND fixed income in tax-advantaged. That is put equities in taxable AND equities and bonds in tax-advantaged. For some folks, they will fill tax-advantaged with bonds and yet they will want more bonds, so bonds will have to spill over into taxable. Another nuance is that folks will tend to have tax-deferred with bonds, but Roths with equities.
Thx again, livesoft - much appreciated.

In reading the wiki (https://www.bogleheads.org/wiki/Tax-eff ... _placement), one possible caveat I noted was "However, low-yielding bonds do not have much return to be taxed, and since they do not grow as fast as other investments, an equal percentage lost from an investment is a smaller dollar loss; this makes low-yielding bonds somewhat more tax-efficient. Therefore, some other investors do just the opposite: they hold stocks with a higher expected return in tax-advantaged accounts when possible. You have to strike a balance between the expected return and the tax rate"

"Balance" (as if often the case in many aspects of life) sounds like it applies here too. :)

waywardguy
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Re: Bond conundrum: looking for recommendations

Post by waywardguy » Tue May 29, 2018 1:15 pm

dbr wrote:
Wed May 23, 2018 8:17 am
waywardguy wrote:
Tue May 22, 2018 10:40 pm
dbr wrote:
Mon May 21, 2018 6:55 pm
jalbert wrote:
Mon May 21, 2018 5:46 pm
livesoft wrote:
Mon Feb 12, 2018 9:52 pm
With that info, I would put 100% bonds in 401(k) and rollover IRA. Then only a little bond funds in taxable as tax-exempt muni for MA. My AA would be about 65% equities which all fit in taxable.

I would not have REITs at all (apologies to @staythecourse).
Would suggest a slight tweak— additionally purchase I-bonds in taxable space each year.
Yes, effectiveness depends on if you are married (twice the purchase limit) and how much money is involved (purchase limit is $10k/year).
Thx dbr and jalbert. Why buy I-bonds in taxable though, aren't they taxed as ordinary income (federal)?
The tax is deferred for30 years or until you redeem the bonds. The function is the same as an after tax contribution to a 401k. It just gives you a little more opportunity for tax management.
Thx dbr, good feedback. I will do more homework on I-bonds.

waywardguy
Posts: 30
Joined: Sat Feb 03, 2018 12:36 pm

Re: Bond conundrum: looking for recommendations

Post by waywardguy » Tue May 29, 2018 3:23 pm

aristotelian wrote:
Wed May 23, 2018 2:04 pm
waywardguy wrote:
Tue May 22, 2018 10:36 pm
aristotelian wrote:
Mon May 21, 2018 5:40 pm
You don't want equities pretax because the growth will be taxed at your marginal rate! Convert the pretax accounts to bonds and CDs, and supplement with Munis in your taxable account.
Thx aristotle, not sure if the terms I'm using are the clearest. By pre-tax I mean tax-advantaged. I hear what livesoft was saying in his post - tax efficient equities make the most sense in taxable accounts. In any case, tax-advantaged accounts will grow tax free until I start taking distribution (or am required to at 70 1/2), so how those tax advantaged accounts 'grow' (bonds, dividends, equity growth, etc.) is immaterial until I start taking distribution, right?

I expect/hope that in the years between my hoped-for early retirement (early 60's) and age 70 I can convert 401K/rollover IRA balances slowly to Roth's (depending on tax rates during those years), in order to avoid a potentially significant tax increase if I left the tax advantaged accounts as is and start taking distribution on tax advantaged accounts at age 70.5
The distribution between Roth and traditional definitely matters. If you go stock-heavy in their 401k, you risk ending up with millions of dollars in the 401k, which will all be subject to tax. If you work up until claiming social security, you then have to pay tax on much of that money at a high rate, which defeats the purpose of deferring taxes. With 401k, you are not only trying to defer taxes until later but also pay *less* tax on the same amount of money.

One way to minimize that risk is take full advantage of Roth and put your assets with the higher expected return (stocks) in Roth and slower growing assets (bonds) in traditional/401k. Of course it is fine to hold stocks in your 401k if you don't have enough space in your Roth, but if you concentrate bonds in your 401k, you can limit the growth in the 401k. The net result is the same amount of money invested with the same allocation between stocks and bonds, but less tax to pay at the end.
Thx aristotelian. I am above income thresholds to contribute to a Roth IRA directly, but given my age (54) and retirement onjective (60-62), I should give more serious consideration to backdooring my way into a Roth IRA over the next several years. At the current limit ($6500/year), 7-9 years of already taxed dollars would allow me to seed it with between $45K and $58K. If I go 'stock heavy' in the Roth and let that run for awhile (plus no RMD's), I'll hopefully be very glad to have done so! :) Thx for your advice.

waywardguy
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Re: Bond conundrum: looking for recommendations

Post by waywardguy » Tue May 29, 2018 3:23 pm

pkcrafter wrote:
Wed May 23, 2018 2:16 pm
Not what you asked about, but your AA is not 55/45 since REITS are stocks, and volatile ones at that. Add the REIT holdings to the equity side.

Paul
Thx pkcrafter, understood. :)

waywardguy
Posts: 30
Joined: Sat Feb 03, 2018 12:36 pm

Re: Bond conundrum: looking for recommendations

Post by waywardguy » Tue May 29, 2018 3:25 pm

grabiner wrote:
Wed May 23, 2018 7:20 pm
waywardguy wrote:
Mon Feb 12, 2018 9:14 pm

B) My goal is to retire around 60-62 and live off after tax accounts and defer SS until age 70. That would lead me to think that, with a longer horizon before needing to draw proceeds from tax-deferred accounts, I can better tolerate risk (equities) in my 401k/Rollover IRA;
This does not matter, because you can reallocate freely; the risk affects you the same way. If you want to withdraw from your taxable account and sell bonds, but your taxable account is all stock, then you can sell stock in your taxable account, and move an equal amount from bonds to stock in your 401(k). Wherever the stock is, the effect on your retirement of a decline in the stock market depends only on how much stock you have.
Thx grabiner, point well taken. Appreciate you and livesoft for setting me straight! :)

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