Retirees are often advised to shift away from riskier investments and load up on assets that are less volatile. And one popular choice among seniors tends to be municipal bonds.
Unlike corporate bonds, which companies use to raise capital, municipal bonds are issued to fund public projects, whether it's updating buildings within a school district or improving roadways. The money you invest in municipal bonds might do more than just generate income for you -- it might help improve your community.
Because of this and other benefits, you may be inclined to invest in municipal bonds, even if you're nowhere close to retirement age. But does it make sense to tie up money in municipal bonds when the return on stocks could be far more substantial?
You're never too young to diversify
While municipal bonds may not be as popular among younger savers as they are among current and near-retirees, they can still be an appropriate investment in your 20s, 30s, and 40s. While it is a good idea to load up on stocks well ahead of retirement, it's also smart to branch out into other assets, including those that are less volatile and those that are income-producing. And municipal bonds fit the bill in both regards.
Plus, no matter your age, the idea of investing in a tax-advantaged manner can hold appeal. The upside of putting money into municipal bonds is that the interest they pay is always exempt from federal taxes. And if you buy bonds issued by your home state, you won't have to pay state or local taxes on your interest income, either.
Municipal bonds are also a good investment if you want guaranteed income in your portfolio. Companies that pay dividends can stop that practice at their discretion. But entities that issue bonds are contractually obligated to make interest payments.
If you own municipal bonds, you can generally expect those payments to hit your account twice a year. That gives you added cash to reinvest.
A smart investment
When you're many years away from retirement, you definitely don't want to put the bulk of your assets into municipal bonds. But it wouldn't hurt to add some to your portfolio to balance your stocks and other holdings.
Remember, if you're still working with many years to go until retirement, you may not need municipal bonds for actual income because you can get that from your paycheck. Someone in retirement, by contrast, might take their municipal bond interest payments and use them to cover expenses in conjunction with collecting Social Security and withdrawing funds from their savings.
But having predictable income in your portfolio is a positive thing at any age. So if you're inclined to add bonds to your personal mix, then you might as well choose bonds with interest payments that won't automatically raise your taxable income.
That said, do be careful when selling municipal bonds. Gains on your bonds' face value are not tax-free. That exemption applies to interest payments alone, and it's important to note that distinction.