Municipal bonds are popular among retirees and near-retirees as they seek to reduce market risk and position assets for a lower tax bill. One way to diversify across this sector is to invest in municipal bond mutual and exchange-traded funds. In 2021 alone, that’s where investors placed a record-high $96.8 billion of their money.1
With interest rates expected to rise this year, many investors may enjoy lower municipal bond prices accompanied by higher yields. Furthermore, investors pay no federal taxes on muni bond interest and, in some cases, no state or local taxes.2
Note that bonds with a shorter duration are less sensitive to interest rate hikes. However, long-term bonds tend to benefit from rising interest rates and may be a good option for retirees seeking income over a long-term horizon.3
If you haven’t repositioned a portion of assets to a more conservative allocation, bonds or bond funds may be a good option for your portfolio. We’d be happy to review your financial situation to determine whether bonds are suitable for your goals and timeline. Feel free to contact us.
One reason bond prices may be attractive this year is that, moving forward, certain municipalities may need to factor in potential climate change expenses as part of their bond issuance strategy. For example, municipalities likely to be impacted by rising sea levels or a surge in wildfires may increasingly need to consider that the sources for repayment of municipal bonds are directly tied to local economic conditions. The higher the risk of climate change disasters, the more likely bond prices will increase. A recent study of this effect, however, found that the risk of default due to factors such as rising sea levels still remains statistically low.4
Content prepared by Kara Stefan Communications.
1,2 Kate Dore. CNBC. Jan. 24, 2022. “How rising interest rates may affect muni bond investors.” https://www.cnbc.com/2022/01/06/how-rising-interest-rates-may-affect-muni-bond-investors.html. Accessed Feb. 5, 2022.
3 Kate Dore. CNBC. Jan. 19, 2022. “Here’s how rising interest rates may affect your bond portfolio in retirement.” https://www.cnbc.com/2022/01/19/heres-how-rising-interest-rates-may-affect-your-bond-portfolio-.html. Accessed Feb. 5, 2022.
4 Knowledge@Wharton. Jan. 25, 2022. “How Sea Level Rise Exposure Is Priced into Municipal Bonds.” https://knowledge.wharton.upenn.edu/article/sea-level-rise-risk-priced-municipal-bonds/. Accessed Feb. 5, 2022.
We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued. Not all municipal bonds are tax-exempt.
Ready to Take The Next Step?
For more information about any of the products and services listed here, schedule a meeting today or register to attend a seminar.