Taxable or Non Taxable

[Seeker]

Why are funds like Wellesley so popular over a state muni bond fund when it comes to retirement investing? Is inflation the key or are other factors involved?

 

[wildcat]

I am going to take a stab at it but I can't really say for sure b/c I am not a big bond investor yet (far from ER). Wellesley gives you income but also small long-term appreciation (b/c it holds some stocks) so I would guess it keeps pace with inflation better than a muni. It is kind of like a growth of income fund rather than a plain vanilla income fund.

 

[MooreBonds]

Why are funds like Wellesley so popular over a state muni bond fund when it comes to retirement investing? Is inflation the key or are other factors involved?

I presume the question is based on your TAXABLE funds. If you hold Munis in an IRA, you're spinning your wheels for nothing and are not taking full advantage of the IRA tax-deferred (or tax-free in the case of the ROTH) advantage.

Another factor to remember: once you ER, your income will likely drop and you will probably be in a lower tax rate (just ask JG ). So, if you do go the Muni route, remember that it would probably make the most sense to switch it all to taxable funds once you reach ER.

As for me...I currently have 31% of my taxable portfolio in MUNI closed-end funds.

One thing to watch out for: many Muni closed-end funds are leveraged. As short term rates have risen greatly, most muni closed-ends have sliced their dividend, since their short-term borrowing costs are rapidly rising. The more a muni is leveraged, the more their dividend will likely be cut. So while those 6%-7% yields selling at 90% of NAV may look tempting now, a duration of 7-10+ will drop those NAVs like a stone and simultaneously cut the dividend.

www.etfconnect.com is a great free resource to find info on closed-end funds. The only drawback is that it doesn't have the same info on all funds....some might only have as little as the NAV and the dividend, while others might have a ton more info to evaluate. When in doubt, check the individual fund family website.

 

[cute fuzzy bunny]

If you have no debt, your income in ER can be low enough to avoid or limit income taxes altogether, so accepting a lower tax free yield doesnt smell as good. As Wildcat points out, historically Wellesleys grown by 5-6% a year on average while producing a ~4% yield.

Its a bit of an odd duck combination of securities...35% large cap value which can be rather volatile but produces good gains over long term periods plus a regular dividend with a ballast of 65% fairly solid high quality bonds that put out the bulk of the income and smooth out the large cap value's volatility.