Municipal Bond Forum
Bonds for California residents
Q
I am 55, looking to retire and need to produce about $350,000 per year after-tax income from a muni-bond portfolio for the next 10 years, and then have it adjusted to cover cost-of-living increases as they occur. I would expect to live to 85 years, or about 30 years from now, which would be the investment horizon. I am a California resident and thus prefer a CA muni portfolio so that it is double tax-free here. How do YTMs (yield to maturities) on 20- to 30-year munis compare using out-of-state issues vs. CA issues, assuming comparable risk parameters? Is there a better annual cash-flow return from a national muni-portfolio if one were to relocate to a state like Florida? I have read your strategies page and have learned that committing to the highest yield instead of laddering (which is what most financial advisers suggest!), is the better strategy. Therefore, what is the best strategy to achieve this investment scale and how much time will it take to assemble such a portfolio?
A
James A. Klotz responds:
You will find since the California State tax on out of state bonds can be as high as 9.3% of income, California issues or bonds of U.S. territories are your only reasonable choices. Out of state purchases will become even more prohibitive if any new tax law eliminates the deduction of state tax from your federal taxes.
There is no question that the cash flow would be greater for a Florida resident since there is no state income tax in Florida.
Naturally, the ability to produce $350,000 of annual income would depend on the amount invested and the prevailing rates at that time; $7 million invested at an average rate of 5% would yield $350,000 in annual income. An average rate of 4.5% would require approximately $7.75 million to produce the desired income.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.