I found my portfolio needed some mechanical repair. I don’t have our bonds in the right location in our portfolio: I have far too little in our taxable Investment account and too much in our Retirement accounts. I scheduled tasks throughout 2024 such that by next December 1 I will have our bonds in the right places in our portfolio. I scheduled to sell stocks every other month to buy bonds to increase the amount of bonds that Patti and I will hold in our taxable, joint Investment account next December 1. This post describes my thinking and actions. As background, you can see how I have organized our Investment and Retirement accounts here.
== Bonds aren’t where I want them ==
I used our Reserve for our spending in 2023. That meant I sold solely bonds, not stocks for spending in 2023. Bonds are insurance. They aren’t long-term money makers. We want them to sell when stocks crater to give stocks a chance to recover. And, boy, that worked out well for 2023: the nominal return for US stocks (FSKAX) is up ~27% following their -20% decline in 2022; the nominal return for US bonds (IUSB) is up ~7% following their -13% decline last year. Stocks bounced back nicely; bonds not so much. (Both stocks and bonds have a way to go to get back to their real, inflation-adjusted level of two years ago.)
I want to have the same ability to sell solely bonds in a future year if stocks crater again. I found in this post that the tactic to “solely sell bonds when stocks tank” is sound. This tactic gives the same safety as rebalancing back to a design mix each year: that would be 85% stocks and 15% bonds for Patti and me, and it will result in greater upside once stocks have recovered.
To sell solely bonds in a year for our spending without ugly tax consequences, I must have a proper amount of bonds in our Retirement accounts and in our taxable account. Right now, I have more than enough in our Retirement accounts, but I don’t have enough bonds in our taxable account.
== Why too little bonds? ==
Why did bonds in our taxable Investment account get to be too low? To minimize annual taxes over the years, I have sold relatively more bonds than stocks in our taxable investment account: the taxable gains in bonds have been much lower than for stocks. I net more for spending after taxes by selling bonds, not stocks, in our taxable account. I still maintain a mix of 15% bonds when I rebalance our total portfolio, but all that final rebalancing is in our Retirement accounts, since I have no tax consequences of selling a security solely for the purpose of rebalancing.
Following this tactic for a number of years means bonds are far less than 15% of the total of stocks + bonds in our joint, taxable Investment account and more than 15% of stocks +bonds in our Retirement accounts. In a sense, bonds have “migrated” from our Investment account to our Retirement accounts.
== The basic math for Patti and me ==
I refer to my spreadsheet in this post that I use for my annual tax plan. It tells me that in a typical year, 70% of the gross sales of securities for our spending is from our Retirement accounts as RMD. 30% of security sales are from our joint, taxable investment account.
I want to have enough bonds in our taxable account such that all the 30% I would sell can be bonds. I couldn’t do that this last December 1. If I wanted to sell solely bonds for our spending next year, I would have to get most of the 30% from added sales of bonds from our Rretirement accounts. Those added withdrawals would be taxed at, say, 22% ordinary tax rate. Ouch. Those added distributions would also push our MAGI that year toward a Medicare tripwire that could cost the two of us $3,000 in a future year. Double ouch if we cross a tripwire.
I need to increase bonds in our joint, taxable investment account to get the structure of my bond insurance in order. It’s much better to sell stocks now to buy bonds in our taxable account: my tax cost is in the range of 6% or so (15% rate*40% gain), not 22%.
To get the capacity to solely sell bonds for one year of our spending, I need to have enough bonds in our taxable, joint account equal to 30% of our security sales for spending by next December 1. If I want to have the capacity for two years of selling solely bonds for our spending, I need to double that amount.
== My decision and schedule ==
I picked an amount that is roughly two years of spending that I’d want from our joint, taxable investment account. I set a bi-monthly reminder starting February 1 in my 2Do App. I will sell stocks (mostly FSKAX) to buy bonds (mostly IUSB) throughout the year. By next December 1, my bonds will be in the right location in the event I want to solely sell them for our spending without too high of taxes.
Conclusion: As I reviewed our portfolio this year, I found I had too little bonds in our joint, taxable investment account. For 2023, I sold solely bonds for our spending, giving stocks time to recover, and they, indeed, rebounded a good bit. I want that same flexibility for the future. To have the ability to do that I needed to repair our portfolio to have bonds in the right locations: I want more in our taxable Investment account and therefore will have less in our Retirement accounts. I developed a schedule to sell stocks (FSKAX) every two months to then buy bonds (IUSB) to get the right total amount of bonds in our taxable investment account by next December 1.