In general I might agree with you, but since my husband and I both have pensions, it wasn’t as necessary to bring down our risk.
That is correct per the experts…
“Municipal bonds are generally not as liquid as stocks. Stocks are traded on exchanges with high frequency and low transaction costs, making them easily bought and sold. Municipal bonds, on the other hand, are often traded over-the-counter, which can involve a more complex selling process and potentially higher transaction costs.
Here’s a more detailed comparison:
Liquidity:
- Stocks:
Highly liquid, with frequent trading and easy access to buyers and sellers.
- Municipal Bonds:
Less liquid, particularly individual bonds, which can be more difficult to sell quickly and may result in selling for a price below market value.
Trading Process:
- Stocks: Typically traded on national exchanges with immediate execution of orders.
- Municipal Bonds: Often involve a bid solicitation process, which can take more time to execute a sale.
Transaction Costs:
- Stocks: Typically low trading fees, especially with online brokers.
- Municipal Bonds: May involve higher transaction costs compared to stocks, especially for individual bonds.”
This is excerpted from Fidelity, Raymond James, and Morningstar’s published materials. All three of whom are active in both types of securities and are obligated by their regulators to be factual at risk of sanctions and loss of their licenses.
I think I summed it up well. In my diversified retirement portfolio, I only have so much room for OTHER people to hold onto my money for many years. I have already done that earlier in my life while I was working (and it worked out well). But now. Come on. If I buy munis now, I very well could be dead before I am able to withdraw and use the proceeds. Right?
I’m in my 70’s and there is a big difference in how I choose to diversify now as opposed to how I chose to when I was younger.
1 Like
We see ours tomorrow, too!
2 Likes
After tax yield on munis is dependent on your tax bracket. Unless you live in a really high income tax state and are at the upper tax brackets, munis may not be the best deal, plus as previously stated, are not that liquid. You can buy shorter duration munis but the yields typically arent as good.
How many retirees are taxed at 37% federal income tax bracket + high state income taxes? 37% marginal tax bracket for a married filing jt is over $750k.
Most retirees arent in the 37% marginal bracket.
4 Likes
Note that the article was written in 2021. If it was published in 2022+, I suspect they would have used different wording. 2022 also highlights the risks of purchasing long term bonds that have an extremely low yield, if not planning to hold to maturity.
2022 annual returns for S&P 500 and different duration bonds are below. I am including both price changes and dividend/yield in the annual returns below.
2022
- S&P 500 – Down 18%
- 30 Year Treasury – Down 30%
- 10 Year Treasury – Down 18%
However, in a more typical market where the fed rate is not 0%, and fed is likely to decrease rate to stimulate economy following a severe stock market crash, then long term bonds can provide a hedge against the stock market crashing. Example returns from 2008 are below.
2008
- S&P 500 – Down 37%
- 30 Year Treasury – Up 23%
- 10 Year Treasury – Up 21%
Interesting - and I agree they are a ballast - but they do also provide a return - even if you don’t care - so it is providing you a positive spin, at less volatitily.
Interesting on the liquidity - and I buy bonds listed on the secondary market - but I’ve never had an issue with getting a bid on a bond - whether I’ve sold it or not (I’ve probably only sold 2-3 in my life but have gotten bids on 30+. I might not love the price - but the same could be said for a stock - and it’s never taken more than 10 mins to get a price as everything is electronic.
Everyone is different - but munis are definitely NOT illiquid.
Many who own with advisors likely own funds and not individual issues - I don’t do that for a few reasons:
-
If I’m earning 4%, why would I pay a .8% or 1% (25% of that) for someone to do - basically nothing…not to mention a fund fee.
-
While individual bonds have price assuredness, funds have redemptions and other things that impact prices.
Good luck to all.
Munis’ main attraction is its triple tax free status, and based on your tax bracket, the effective after tax yield could be higher than corporates or Treasuries. If you go from being a high earner to a retiree in a lower tax bracket and/or if you move to a non-income tax state, the tax benefits are reduced and the effective after tax yield for taxable fixed income products may be greater.
Not all munis are equally safe. It depends on what is backing the issue. Is it a general obligation of a city/county/state that is relatively sound or does the income stream come from a specific revenue stream with no or a limited guarantee. There are AAA munis and there are sub-investment grade ones as well.
2 Likes
I must admit this is what I hear as munis are discussed over and over (replace Marcia with Munis).
6 Likes
Yep - triple (if you have a city tax).
Munis - unless you don’t know how to pick, will typically always be higher than treasuries and while corporates pay more, they are not backed by the same level of security. I mean, if you buy a Microsoft bond, you’re fine - but it won’t pay well. If you buy a bank bond - well we’ve seen what can happen to top banks - Wachovia, Morgan Stanley had to be bailed out as did Merrill, etc. - so it’s a safety thing - corporate bonds have a higher default rate than munis - which don’t default.
I agree not all are equally safe - why I’ve mentioned investment grade - but even CCC munis - the overall default is less than .2%. But I shy from hospitals, and low rated issues or issues backed by companies (although I own a ND community college backed by tax payments from Johnson Control).
But people buying those munis are chasing yield…i’m buying A+ or greater and lately have been buying insured with underlying A+. I’m only buying safe !!
Next to treasuries and agency bonds, munis are your next safe thing - and historically very very safe - with few (but some) hiccups. There is really no debating that…every article ever published shows that and the very low default rate…but yes, buy solid, not crap.
I was thinking more about the actual question of the thread - how much do you think you need to retire. I think the answer varies a lot on not only your expenses and earnings in retirement, but on when you plan on retiring.
When my husband early retired at 60 (not planned - due to being laid off), we needed cash on hand to bridge the time from his early retirement until his full retirement age (roughly 6 years). We have been fortunate enough to have non-retirement savings to fund this time period (helped by a big cash boost when we sold our home and moved into an apartment). We have kept these funds completely liquid (as we use them everyday to pay for living).
If he had continued working for 6 more years, our planning and retirement number would have been very different. We would have continued putting money into retirement savings and the amount we needed each year at retirement would be lower because we would be getting SS payments from the start of his retirement.
Also, playing into this were the costs of medical insurance. We bridged the time until Medicare using the state market insurance and that factored into both costs and limiting income (to keep premiums down).
11 Likes
I agree, but I don’t mind people getting into the weeds about munis.
I am so thankful to have learned so much from the cc community but have decided that this is not going to be one ot them!
6 Likes
There is a current discussion on municipal bonds on the Bogleheads forum for those interested.
3 Likes
Yes, back on topic. Here’s how we figured it out with the help of our FA*:
-
Do we want to live at a level less than, equal to, or more than our current standard of living? (We chose to keep our current standard of living, but you need to start there; you can’t know how much is “less” or “more” until you’ve figured out what “is.”)
-
Exactly how much was funding our current standard of living? (Easily known from a decade of tracking monthly cash flow. Whether some categories would become obsolete was immaterial as others would most likely replace them.)
Then she asked us many (many) questions, like:
- How often do you replace your cars?
- Do you plan to stay in your current home (if so, what repairs may be needed; if not, where do you plan to move/how much do you plan to spend on housing?)
- How much is your estimated SS FRA and when do you want to take it? (We did not want to figure SS into our plan)
- Do you want to travel? (If so, how often and with what budget?)
- Do you see yourselves owning a second property? (No, but that didn’t hold.)
- How much do you currently having in savings and investments and how are you funding them?
- How many children do you have? (Do you plan to pay for college/weddings/cars?)
- Do you plan to leave an inheritance? (Do you want to grow your assets, preserve, or draw down?)
- At what age would you each like to retire and how long do you want your funds to last?
- How much do you think you need? Do you have a number in mind?
- What is your investment risk tolerance?
From this information (and much more), she worked a dynamic model that considered inflation, escalating healthcare costs, long-term care, the potential cost of private OOS college in the year our son graduated from HS, a 20% market pullback every eight years (we are risk averse), etc. In addition, she helped us create a trust, wills, HCPOA, funeral directives, etc. She also started a 529 when our son was in first grade and, about the time he turned eight, began teaching him about investing and advising him on how to manage his savings account. She kept advising him through his high school years. By the time he entered the academy, he had a nice portfolio of his own which he manages himself now.
Regular meetings, discussions, and modifications as our lives changed (we’ve been with her over 20 years now) produced a living plan and a portfolio number that made sense and that we were comfortable with. She also addressed the mental transition to retirement in our discussions (targeted to DH, I was just counting the days). When we finally met our nut and were trying to decide exactly when to step off, she told us, “Retirement is a faith position. You’ve done the work and you’ve gotten where we agree you need to be. You need to believe in that work. You’re good to go.” We worked two years past that discussion to build a cash fund for some final nest feathering, and then we had an unexpected windfall when our son chose a service academy and the 529 funds came back to us penalty-free (minus taxes on the gain).
*We’ve been comfortably retired eight years now, no surprises, and even with this pullback, we’re further ahead than when we stepped off. I know many here distrust FAs and do well managing their own funds but, in our case, we look at it as marriage insurance (we don’t want to blame each other for any bad decisions) and don’t begrudge a penny we’ve paid for her wisdom and solid management of our investments. We sleep well at night.
ETA: I know nothing about munis. 
13 Likes
I know it has been addressed here a number of times, but always worth saying again. You saved for all those years, so that now is the time to spend. Very hard to wrap your minds around this change in thinking. I too struggle with our total net worth numbers going down, but this is what I saved for, to live comfortably in retirement.
8 Likes
Unfortunately, the current financial situation has us hesitating to spend more than absolutely necessary. Our financial advisor has assured us that we’re fine, but the fact is that we didn’t get where we are financially by spending when we felt that we shouldn’t. So it’s hard to “just do it.” And there’s a bit of a disconnect between us in terms of what we “need” first. Frankly, I think it’s easier to hide behind the idea of being careful in the current financial climate than it would be to say “let’s spend $x” and then have to figure out which projects get the money!
7 Likes
This is a pretty good way of thinking about it.
For me, I’d like to have the same flexibility I have now - travel nicely, hobbies, and still be able to help my kids/grandkids if needed. To do that, I figure I’ll need an inflation adjusted 80% of my current salary every year.
I’m going to assume that I’ll get at least 70% of my social security benefit (which is the current worst case scenario), and the rest will come from investments. I’ll go with the 4% rule (I’ll distribute 4% of my portfolio every year). So with those two numbers in mind, I’ll need somewhere between 20 and 25 times my current salary in my retirement portfolio.
That seems pretty solid of an estimate. I’m 49 and about 1/3 of the way towards that goal. Assuming the market averages 8% over the next 13-15 years, I should be fine.
It’s a bit uncertain times right now though, so I’m actually accelerating savings to smooth out some potential rough years. That and um, college is expensive.
3 Likes
I agree that when you plan to retire has a notable influence on how much you need to retire, but not primarily for the reasons you listed. There are many ways to withdraw from retirement accounts without early withdrawal penalties – SEPP, rule of 55, Roth contributions can be withdrawn at any age without penalty, etc.
I’d be more concerned with things like fixed payments may have gradually less purchase power over time due to inflation, sequence or returns risk, etc. I previously have posted about safe withdrawal rate. The general pattern was the longer your time horizon, the lower % of portfolio you can safely withdraw for a given risk of failure. The classic 4% safe withdrawal rate works reasonably well over a the standard 30 year time horizon (assuming a particular equity / fixed income balance), but doesn’t work as well if you live significantly longer than 30 years during retirement.
2 Likes
That is a great list of questions even for those of us who manage our own investments.
I have a sibling with poor health who is presently staying with me following a hospital stay. We are talking about how she sees her life changing and how financial decisions can be taken into account. She has great healthcare and a large pension and SS and savings. Her pension is more than many working salaries but care is expensive.
2 Likes
Excellent and thorough post!
We just got ‘caught’ with one of the Annuity life insurance companies requiring new annual paperwork on the penalty-free withdrawal. DH has two, one with this anniversary date and another one ‘upcoming’.
Since we see our FA every 6 months, we will keep this on the radar, so DH doesn’t have to make an extra trip into their office.
We count on the annuity monthly cash flow. FA will make sure we have everything ‘caught up’ - I was out of state when the notice came in and was just catching up with the mail when I saw the notice from insurance company. FA was unaware of this requirement with this insurance company - but their group is now familiar with it.
You worked with your FA a lot longer than we did, and yours had a lot more detail - “she helped us create a trust, wills, HCPOA, funeral directives, etc.”
If things go the way we need to go (move to another state to help DD1/SIL with their 5 children and be involved in their lives) will look to set up more in the new state. We have wills but not as much stuff as we should have set up here.
We had no issues with mental transition to retirement - DH had a boss he was glad to be rid of (who treated him like a pack mule instead of the thoroughbred racehorse DH was – in engineering knowledge base and skills that no-one companywide could pull off, yet this non-engineer boss thought DH would put up with that crap, no DH turned in his 2 week notice at age 64 1/2 because he could afford to do so). I took a sunset career and retired right at 65 - worked enough time to get my own SS, and the cash flow was good for use to shore up a little with some home upgrades we wanted to do. My sunset career was jumping in at less money than when I left FT career work in 1999 (I was in management using lots of skills) and went back in to not great pay in our state for RNs/BSNs.
1 Like