What bonds in taxable

[mags]

I need help managing my Mom's finances. She is 75/25 stock/bonds. She is over 70 and retired. SS and pension cover expenses. 2.3 million portfolio. I have run out of space in 401k for bonds. She lives in WA state, so no state tax. What exact bond fund should I use in her taxable account. Total bond fund or VWITX VG intermediate tax exempt). Or something else. Taxable income about 85k/ year. She spends 40k a year. She will never need this money and is becoming very risk averse. She wants to pull all money out of the market but I am trying to tell her to "stay the course" but maybe adjust AA based on risk tolerance. Thoughts?

[000]

She [...] is becoming very risk averse. She wants to pull all money out of the market but I am trying to tell her to "stay the course" but maybe adjust AA based on risk tolerance. Thoughts?

Treasuries or TIPS or Series I savings bonds or FDIC insured cash.

For a very bond heavy portfolio, further diversification could be considered.

[rkhusky]

Int Tax Exempt would be fine. So would Total Bond.

75/25 is rather aggressive for a 70 year old, unless she specifically wants to invest for heirs. 30/70 - 50/50 would be more in line with target date averages.

[Trader Joe]

"What bonds in taxable"

Ideally, none.

[sycamore]

It sounds like she's single so taxes are a consideration. If she goes with a taxable bond fund, that'll be taxed as income, whereas currently it sounds like she's at least only paying qualified dividend tax rates on her stock fund's dividends. An advantage of the muni fund is that there's no federal income tax on it.

A muni fund like VWIUX is currently paying higher yield than Total Bond Market which is historically unusual. The story is that investors are concerned about municipal finances being severely disrupted by COVID so there's risk with bond payments not being made. But then again the Fed is willing to step in a be a buyer. She & you will have to figure where you stand on that issue if you go into munis.

Rather than get out of stocks altogether, one good option is Vanguard's Target Retirement Income fund. It keeps a decent amount of stocks 30% with the rest in bonds including some TIPS. If you and she wanted just one fund for simplicity, VTINX could be it.

Now that I've written all that, I should've said the first thing to do is figure out a good plan going forward. Work with her to find an asset allocation she'll be comfortable with for a long time and not try to sell based on current conditions. From there you can pick the right funds to use: muni vs taxable, short-term vs intermediate, govt vs corporate.

[Silverado]

"What bonds in taxable"

Ideally, none.

Thus the question I assume. We may get there, but likely never will be forced to figure this out.

[JBTX]

I don't think it matters much. The tax bite is going to be very small at her income and current rates.

75% stocks is entirely inappropriate for a 70 year old who is very risk averse. I'd go as far as grossly negligent. I'd say 50% max. More like 35-40%. Respect her wishes. Vanguard target date 2020 is 48% equities. Vanguard 2015, which would be for an approx 70 year old, is 35% equities.

[JBTX]

"What bonds in taxable"

Ideally, none.

At 1% interest and $85k taxable income it is rounding error on a $2.5m portfolio.

[aristotelian]

"What bonds in taxable"

Ideally, none.

OP says pretax account is already maxed out. She has 25% bond allocation and is looking to expand. Bonds in taxable are not "ideal" but sounds entirely appropriate in this case.

I Bonds would be a good safe choice but she would be allowed only 10k per year.

[abuss368]

Tax exempt off her tax situation called for it. Perhaps Treasuries or Total Bond which is 2/3s Treasuries and Government Backed.

[mags]

Thanks for the feedback!

[grabiner]

With a taxable income of $85K (implying a gross income of about $100K if she takes the standard deduction), and some of that from qualified dividends (since she has a lot of stock), her marginal tax rate is 22%. At that rate, taxable bonds are probably better for the same risk level, and Total Bond Market Index is a natural choice.

[abracadabra11]

It might be worthwhile to have a specific conversation with her about risk. What risk is she specifically concerned with? We oftentimes use volatility as a proxy for risk and it works well in some instances, but doesn't in others. Since her income exceeds expenses by 2X, then I can't imagine she's worried about funding the rest of her retirement. But perhaps she has other goals/priorities that you need to understand to better support her as a financial guide.