Are Municipal Bonds a Good Investment For Retirement Income?

You’ll notice that bonds aren’t as popular as they once were if you pay attention. Values are falling, the risk is rising, investors are selling and municipal bonds are not the safe havens they used to be. Leaving the question “are municipal bonds a good investment”

Andrew Osterland, a financial journalist for reported that “with the demise in the bond insurance industry during the financial crisis,” credit quality in the market has become a greater concern for investors. 

Financial Times had earlier this year noted sell-offs, and stated that “the long bond rallies could stall, or even unravel in 2018,” according to Even had harsh words about bonds in its December 2017 article.

The outlook for the bond markets is grim. It’s not worth taking the chance to own it, with the benchmark 10-year Treasury yielding only 2.36%. If market rates were to rise by just one percentage point, that 10-year bond’s price would drop approximately 9 %.”

Although we may think that rising interest rates are a good thing, bond prices move in opposite directions to interest rates. 

So. Are Municipal Bonds A Good Investment?

A bond mutual fund’s value can be affected by the fact that the bond manager may sell bonds in an environment with rising interest rates, while open-market investors will demand discounts on older bonds paying lower interest rates. Bond values can plummet when bond issuers default.

Some investors believe that bonds cannot lose money. As Kent Thune, a December 2017 article at explained, a common misconception among investors is that “bond mutual funds are safe.”

Bloomberg Barclays Municipal Index suffered a 2.5% loss in 2008, during which it was supposed to protect municipal bond investors. 

Morningstar analyst John Coumarianos notes that while it is not catastrophic, it may not have been the resilience bond investors expected. He then predicts that “results might prove less benign” during the next stock market crash.

In recent years, municipal bonds have become more unpredictable. In recent years, municipal bonds have become more unpredictable. Bondholders are required to wait behind employees’ pension funds in order to receive a payment if a municipality goes bankrupt.

“The Worst Jan Since 1981”

Even diversified municipal bond funds have been affected. January is often a strong month for the municipal bond markets. Osterland says this was not the case this year. Citing a loss of 1.18% in the Bloomberg Barclays Municipal Bond Index for January, Osterland states that it was “the worst January since 1981 for municipal bonds.” The fund also posted a 1.65% year-to-date decline on April 24.

We could see worsening problems if we add rising interest rates and lowered corporate taxes which reduce incentives for muni bonds.’s managing partner, Tom Hession of Riverbend Capital Advisors stated that interest rates had hurt the market. Hession said that people see rates rising and sell. Hession also suggested that municipal bonds could be an option for those who are comfortable in volatile environments.

Steven Goldberg, a Kiplinger columnist, warns income-hungry retirees against seeking higher yields from troubled businesses. He says that bonds are not intended to generate income but to reduce volatility in your overall portfolio. Can we trust bonds to provide steady income? Perhaps not.

Goldberg continues to recommend four bond funds, which he considers the best in a weak and unreliable asset category. Two of these funds receive a depressing warning: “Don’t expect either Vanguard funds will return more than 1%/2% annually anytime soon.”

Another receives a warning that says “you’d expect to lose approximately 2.6% if rates went up one percentage point.” Goldberg also warns that the other two bond funds are “quite riskier” because they invest in so-called “junk bonds” and emerging market debt.

Bonds are the “safe” and steadily-gaining portion of your portfolio.

Bond funds are less risky than stocks market funds. However, they have more moderated losses and profits. Investors who rely on bonds to deliver gains in the event of a stock market fall may be disappointed.

Looking For Municipal Bond Alternatives?

If not bonds, then what? It all depends on what you wanted to get out of bonds.

We believe there are alternatives to muni-bonds that were originally intended for income. Private lending, the oldest form of investment available, is still viable. Regular monthly income can be generated by private equity funds, bridge loans, and land leases. Annuities that are immediate may be an option depending on your financial situation.

High cash value whole life insurance is a good option if you are looking for bonds that provide long-term stability and safety, as well as reliable tax-advantaged growth. 

While dividend earnings rates can vary depending on age, health, insurer, and policy owner, the net policy value gains after costs for most policy owners are in the 2-4% range, if held long-term. This does not include any additional death benefits that are paid to beneficiaries. 

To match whole-life insurance’s gains, you would need to earn at least 4 to 5% in order to adjust for preferential tax treatment (tax-deferred, sometimes tax-free gains so long as the policy is in force).

A rate of 5% in most investments is possible, but it is important to consider the asset’s quality when you are looking at life insurance. This is not equity that can be ridden on a rollercoaster, but an asset that has been proven reliable over time with minimums. 

Dividends have been paid faithfully for over 100 years in every economy. Gains are also locked in. Life insurance is safer than muni bonds in today’s market because it meets industry requirements for cash reserves.

If you only need a short-term cash store, an internet bank savings account is better. At the time of writing, banks such as Ally, Discover, and Marcus all charge around 1.5% with no monthly fees. If you are willing to give up liquidity, CDs maybe a little more expensive.

We don’t recommend that you give up “safe money” to rely solely on mutual funds or ETFs. This is a way to set yourself up for failure without a safety network.

Are you ready to look at other ways to save and invest?

Verdeo Financial teaches you how to make wealth without Wall Street or the big banks. Contact us today to learn more about cash, bond, or stock alternatives!