How the Ultra-Rich Use Municipal Bonds in Retirement

For the ultra-wealthy, municipal bonds aren't conscionable astir earning interest. They're a mode to fastener successful tax-free income, screen indispensable expenses, and escaped up the remainder of their portfolio for higher-growth investments.

But adjacent though muni bonds whitethorn connection unchangeable income, they aren't a cleanable acceptable for each retiree, and they travel with risks that are casual to overlook.

Why the Wealthy Turn to Municipal Bonds

One large crushed municipal bonds are fashionable with affluent retirees? Taxes. "Municipal bonds tin supply stable, high-quality, tax-free income," says Noah Damsky, laminitis of California-based Marina Wealth Advisors, noting that they're federally tax-free, but lone occasionally authorities tax-free.

For example, munis whitethorn beryllium exempt from authorities and section taxes if you unrecorded successful the authorities wherever the enslaved is issued.

Reducing taxable income tin marque a immense quality for those successful higher brackets, making munis a astute mode to support wealthiness without giving much distant to taxes.

Plus, the comparatively unchangeable quality of galore muni bonds—especially general work bonds backed by a authorities taxing authorization (instead of gross from a fixed project)—makes them an charismatic mode to money day-to-day surviving expenses successful retirement.

Risks and Common Pitfalls to Avoid

Despite their estimation for safety, municipal bonds aren’t foolproof. "While they're often precocious quality, they're not without risk," Damsky cautions. "They tin transportation a important magnitude of interest complaint risk and immoderate credit risk."

Liquidity is different interest galore investors miss. "They tin beryllium hard to merchantability astatine a bully terms successful large blocks, particularly if the marketplace is stressed," Damsky says.

What's more, buying the incorrect benignant of muni tin adjacent trigger an unexpected taxation bill—a astonishment galore retirees aren't prepared for.

For example, if you bargain a private enactment bond, and your income is precocious enough, the involvement mightiness beryllium taxable to the alternative minimum taxation (AMT).

If you’re looking for further harmless options for currency management, you besides mightiness privation to research high-yield savings accounts for flexible, FDIC-insured savings.

Why Home-State Bonds Aren’t Always Best

Many high-net-worth investors bargain municipal bonds issued lone successful their location authorities to debar paying authorities income taxes connected involvement earned, noted Damsky.

But concentrating excessively heavy tin backfire. "While these bonds tin beryllium precocious quality, attraction successful 1 peculiar authorities is not optimal," helium said.

Economic oregon governmental problems successful 1 authorities could deed your portfolio harder than you expect. Diversification inactive matters—even for bonds that look safe.

How the Ultra-Wealthy Structure Their Portfolios

For the ultra-rich, muni bonds aren’t the full crippled plan. They're often portion of a bigger strategy to make a maturation and income portfolio that relies connected assets similar alternatives too.

"I find that the ultra-wealthy similar to barbell their portfolios," Damsky explains. "They privation to person their harmless wealth successful high-quality fixed income, and person their assets beyond surviving expenses successful high-growth investments specified arsenic private equity, backstage infrastructure, and venture capital."

Once they consciousness assured that they person secured their manner with blimpish investments, they crook to high-growth investments to proceed to physique generational wealth, helium adds.

This attack efficaciously gives them a unchangeable income portion they prosecute semipermanent growth.

When Munis Might Not Make Sense

If you’re trying to physique wealthiness aggressively successful retirement—not conscionable to sphere it—relying heavy connected munis mightiness not beryllium the champion move.

"Municipal bonds tin beryllium large for sustaining existing wealth, but they are improbable to compound wealthiness implicit the agelong term," Damsky says.

That's because, arsenic fixed-income securities, they connection income, not superior appreciation.

Munis tin beryllium a almighty concern tool—but similar immoderate tool, they’re lone close erstwhile they acceptable the occupation you’re trying to accomplish.

The Bottom Line

The ultra-wealthy usage municipal bonds to make a reliable instauration of mostly tax-free income, covering their indispensable needs portion investing boldly elsewhere.

But muni bonds aren’t risk-free, and they’re not a one-size-fits-all investing solution. Understanding however they enactment and erstwhile they don’t tin assistance you physique a status program that fits your goals.