Most people worry about stock drama, but every so often, there is also bond drama. Bonds are debt, which means people worry when there’s an increased chance you won’t get paid back. However, the goal of my bond holdings is to have at least 5 years of expenses safely set aside so that I can comfortably ignore both stock market drama and bond market drama. If you assume a simple 4% withdrawal rate, that means roughly 20% of my portfolio should be in very safe bonds.
“Safe” means that my bonds should have both minimal default risk and interest rate risk. Minimal default risk means ideally either FDIC/NCUA-insured cash or certificates, or US Treasury bonds. Minimal interest rate risk means a relatively short duration.
In the idealized “mental model” of my bond portfolio, this is a ladder of 1-year, 2-year, 3-year, 4-year, and 5-year certificates of deposit. Each rung of the ladder is a year of expenses. As each year passes, the 5-year CD will now have 4 years left to mature, the 4-year...
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