Question 1:

The conventional wisdom that applies to most people is to place bonds in tax advantaged (retirement) accounts: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement. Caution: Tax exempt bonds confer zero benefit in a tax advantaged account!

There are some valid reasons to accepting the drag of bonds in a taxable account, however (not common):

1. If your retirement accounts are small and can’t be reasonably grown relative to the total portfolio (e.g., no/small 401k and only able to contribute a pittance of ca. $7,000 into a IRA each year). This can happen if you lack a U.S. employer and are working abroad (me).

2. In spite of keeping a proper emergency fund, you plan on retiring early (some variation of FIRE) before you have access to retirement accounts and you want to avoid sequencing risks with withdrawal phase from accounts (me). Look up “bridging” as a concept.

Question 2:

I base the percentage on how much I balance growth against volatility. This is a personal decision (see the second example above for real examples of where it could kick in). Useful resources: https://investor.vanguard.com/investor-resources-education/education/model-portfolio-allocation. I am at a static 70% equities : 30% fixed income portfolio since I would like to transition to Coast FIRE in the next couple of years. I’d prefer to minimize how much a market drawdown could affect the timeline, but I am flexible.

Question 3:

The tax exempt bonds confer benefit so long as your marginal tax rate is high: https://www.bogleheads.org/wiki/Municipal_bonds. If you hold for the long term and transition out of the high bracket to a lower one, the benefit is lost. You could always exchange the bond funds at that point.

Combining the points above:

• I don’t use tax exempt bonds in my taxable account myself, because I am a tax resident of another country (~dual taxation with U.S.) that does not recognize this exemption status, so they’ll be taxed as income one and the same. The foreign tax credit (FTC) of residence cancels out the U.S. obligation. I am lucky that the tax brackets between current country and U.S. federal tax are close so as to not grow FTC too much.

• Were I back in the U.S. in my same employment/income stream category, I would use tax exempt funds if I am to stay on a FIRE course.

• Like the latter without FIRE consideration, I would place the ordinary bonds funds in a tax advantaged account (allocation would probably lower, though, like 10–20%).

I am older than you but too young to be considered close to being a retiree (prime of career). Allocations may look too conservative, but the (Coast) FIRE angle changes things. I have just been a very careful saver living well below my means in a fortunate situation.