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What is the downside of $1 million in individual Muni Bond Portfolio?
Old 04-06-2008, 08:28 PM   #1
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What is the downside of $1 million in individual Muni Bond Portfolio?

Assuming 30 yr bonds yielding 5%. You get $50,000 of after tax income/yr.

Purchasing power deteriorate over 30 years is bad but still keep $1 million at manturity.

Annuity a better choice?

mP
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Old 04-06-2008, 08:58 PM   #2
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will that much tax free income trigger AMT? Part of AMT is muni bond income, I think.
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Old 04-06-2008, 09:01 PM   #3
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Purchasing power deteriorate over 30 years is bad but still keep $1 million at manturity.
The $1 million is also worth less in today's dollars.
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Old 04-06-2008, 09:14 PM   #4
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Quote:
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will that much tax free income trigger AMT? Part of AMT is muni bond income, I think.
Non-AMT bonds will help........but inflation will eat that portfolio for a snack.........
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Old 04-06-2008, 09:21 PM   #5
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A pure bond portfolio will have a hard time to keep up with inflation. You may want to increase holdings of stock and/or TIPs/IBonds.
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Old 04-06-2008, 09:27 PM   #6
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A lot less. At 3% inflation $1,000,000 is equivalent to $411K in 30 years.

That said there is a lot of crazy turmoil in the muni market, due to the problems of MBIA, and other bond insurers. This has widened the yield differences between Muni's and treasuries to historically high levels. The studies that have come out recently seem to show that the default risk of a relatively low rated Muni A or BBB are in reality closer to a AAA corporate bond.

I also think that odds are very good that we will see a rise in top tax brackets, and/or the tax rates capital gains, and/or dividends. All of which wil make Munis are relatively more attractive in coming years.

I think having a $1 mill portfolio of muni consisting of 20-40 individual issue and staggered maturities as major portion of your retirement income, might make sense in some cases. Obviously you wanted to have a additional taxable income in order to benefit from owning munis. I think you'd also want to construct the rest of your assets to be pretty inflation resistance (e.g. Real estate, maybe commodities, and equities.)
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Old 04-06-2008, 09:51 PM   #7
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For a 20% tax bracket (15% fed, 5% state), it is an euqivalent of 6.25% pretax. What will equity return be during the next 30 years?

You also get to spend the 5% interest each year = worth more when spend it yearly and not let it sit in capital gain.

S&P 500 return is higher historically, but unless you cash in your gain, your gain also worth less in the future, your initial invested amount also worth less 30 years from now as well.

Perhaps, invest in DVY (decent divident - pay taxes on it) and hope for additional capital gain to keep up with inflation?

Boy, planning for income in retirement is becoming complicated.

mP
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Old 04-06-2008, 09:58 PM   #8
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AMT isn't triggered by Treasury bond income in my experience.

I judged the long bond as a good investment a few years ago. I'm still getting 5.25%-5.5% interest with tax considerations (while interest rates have continued to tank), including capital gains it goes up to 8% annualized or so I guess. You can sell and go short as rates drop.
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Old 04-06-2008, 11:27 PM   #9
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Private-purpose muni bonds (for stadiums, etc) count towards AMT - most do not.
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Old 04-07-2008, 05:49 AM   #10
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It will have an impact on percent of SS taxed also within that 30 year period for you.
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Old 04-07-2008, 08:22 AM   #11
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50k of after tax income loses 1/3 of it's purchasing power after only 15 years at 3% inflation. It loses half when compared to the overall standard of living over that same period.

If one's life expectancy is currently 30 years, but in 30 years another 15 years is added, there is not enough money to avoid a serious decline in living standard.

If, for some reason, tax policy were to change and the muni tax advantage were eliminated, the bonds wold probably continue paying the coupon but at the same time decline significantly in value.

If the sector were to suffer a financial misfortune, both the coupons and the face values might incur significant losses.

If long term interest rates were to increase steadily over the next decade, the bonds would lose considerable value.

Diversification is important in portfolio management - moreso when it is the primary source of income. Muni yields are compelling right now, but no asset class should represent one's entire portfolio.

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