Retirement

Municipal bonds and low tax bracket investors

I’m no expert on investing. Beyond the basics of diversification I rely on true experts when it comes to investing, but I do like municipal bond funds because I like the relative stability of monthly tax-free income. At some point in my retirement I suspect inflation will cause the need for more income and when that time comes I will use my tax-free interest each month to supplement my income while not touching the principle of my investments. It’s a nice feeling, at least to me. For now that interest is reinvested which means that if bond prices slip because interest rates rise, I’m buying more shares of the mutual fund each month. Over the years I have not made much from rising bond prices, but that’s ok  because it’s not why have these funds.  I want tax-free income and tax favored dividends to supplement my income when I need to do that.

To bond or not to bond. That is the question.

To bond or not to bond. That is the question.

There is no doubt that if I had invested in the S&P 500 since 2009, I would have more money. I would also have had more angst along the way and I don’t like angst.

If you are considering municipal bonds, you might want a good mutual fund, I favor Vanguard funds because of their low fees.

Make sure you have a specific goal for investing in municipal bonds. Don’t forget the value of your bonds will decrease at interest rates rise so you may want a mix of short-term, intermediate and long-term bonds. Finally, the interest rate on municipal bonds is lower than taxable bonds simply because the interest is tax-free. That means your state and federal tax bracket is an important consideration when evaluating your bond strategy. For lower-income individuals taxable bonds may provide an overall better return.

Click on the link below for a detailed discussion on this topic.

Municipal bonds and low tax bracket investors.

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