Municipal Bond Forum
Focus on maximizing income regardless of age
Q
You have made a case against laddering, but did you ever consider that some of us are retired and need this income to live on? We can’t reinvest the income of these bonds as you showed in your examples. What do you suggest to the people in their 70s and over who need more income? We need to preserve our principal in order to continue investing it.
A
James A. Klotz responds:
We always take this into consideration since a substantial number of our clients are retired and living on their tax-free income. They buy long-term bonds and collect 35% to 50% more income than they would with a short-term laddered portfolio.
Actually, we were a bit surprised by your question. If you have employed a laddering strategy in the past, you have experienced the double whammy of initially sacrificing income, and then being forced to reinvest your principal at lower rates as bonds come due.
If you are currently able to live on the income from your laddered portfolio, you can reinvest the additional income thrown off by long-term bonds. (Example: 5.00% as opposed to 3.50%.)
Remember, over the life of a long-term bond, it will sometimes be worth more than you paid for it, and sometimes less. What’s the difference? Enjoy the income! Your bonds will either be called or mature at full value.
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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.