During your working years, it’s a good idea to invest heavily in stocks, since that could lead to solid, steady growth in your portfolio. But as retirement nears, it’s smart to shift over to safer investments, like bonds.
Bonds don’t tend to be as volatile as stocks, and so at a time when you might need to tap your investments for income, they’re a good bet. And if you’re going to buy bonds, you might want to focus on municipal bonds (or muni bonds) over corporate bonds.
Corporate bonds tend to come with higher yields than muni bonds. But muni bonds have a few distinct advantages. First, the interest income they pay is always tax-exempt at the federal level. And if you buy muni bonds issued by your state of residence, you can avoid state and local taxes, too.
Investing in US I Bonds: Savers can fight back with these 9.6% inflation-proof US bonds
Also, historically speaking, muni bonds tend to have lower default rates than corporate bonds. That means they could be a safer bet for your retirement portfolio.
But while muni bonds certainly have their perks, there’s one pitfall you should be aware of if you’re going to hold them during retirement. Otherwise, your financial plans could be thrown off-course.
Could your muni bond interest result in taxed Social Security benefits?
Seniors who get all or most of their income from Social Security can often avoid taxes on their benefits. But once your retirement income exceeds a certain threshold, taxes on Social Security benefits will…
