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The very low interest rate you get on Money Markets these days make me think you want to minimize the funds in a Money Market. But if you need the funds to cover your living expenses, you do not want to be forced to sell Index Fund shares in a down market.

The Motley Fool recommendation to deal with this problem is to put five years of living expenses into a laddered maturity bond portfolio. Then you live off the maturing bond each year and in normal times sell Index Fund shares to buy another five year bond. If the market is down, you defer replacing the maturing bond until after the market has recovered.

The dividends from the Index Fund give you some flexibility. Reinvesting them in the Index Fund can be best if you use the bond ladder. Or you can calculate the amount you expect from the index fund dividends each year and reduce your living expenses number and the size of the bond portfolio by an appropriate amount. I see no real advantage either way. Reinvesting the dividends in the index fund is a bit more conservative as dividends might get cut in a down market.

The bond ladder approach also has the problem that interest rates are very low just now. But the Fed seems to be thinking about raising rates in a few years. If you could wait a while to set it up, the better yields available then might make it more attractive.
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