Tax Exempt Bond funds for high tax bracket: good or bad?
I've invested in the Vanguard Long Term Tax Exempt Bond fund as an overflow of savings after maxing out my retirements. I'm borderline 35-39% bracket. This fund has a return around 5%, which is quite a bit more if you factor in no tax. It seems like a fairly safe play for a decent long term investment. I understand this is not guaranteed income and it can lose money, and did some in 2008 though much less than the stock market. But i'm naive, and would love feedback and what I may not understand.
What am I missing?
Fri May 27, 2016 9:15 pm
oldguy Senior Member
Cash: $ 714.80
Joined: 21 May 2006
quote: It seems like a fairly safe play for a decent long term investment. I understand this is not guaranteed income and it can lose money
Yes, fairly safe. But remember the Law of Investing, risk and return are directly proportional. Eg, a savings account is risk-free, but it pays about 1% and inflation takes all of that, in fact , that is what it is designed for, safe storage of your money. Conversely, if you want an 8% or 10% return (something that out paces inflation by 7% or 9% and builds wealth, you must be prepared to take a commensurate risk - ie, you don't want 'guaranteed' 1% stuff.
If you're fairly young, you'll want to add risk and build wealth over the next 20 years If you're older, you'll want moderate risk as a hedge against inflation and a way to protect the wealth that you've already built.
Your municipal bond fund has a duration of 6 years, that is fairly safe - ie, if federal rates go up a couple %, your principal won't go down much, not nearly as much as someone who holds 30-year bonds. If Janet Yellon (and her 2017 replacement) don't get too excited, you should be in a good position. (The equivalent return of a 5% muni is 8.2% for a 39% tax bracket. ) IMO, you've made a good choice.
Sat May 28, 2016 12:35 am
lowrunner New Poster
Cash: $ 0.45
Joined: 27 May 2016
I appreciate the reply and direction. For clarification I'm in the Admiral Shares that Vanguard offers at a lower expense ratio.
I'm in my early 40's and in at a place in savings where I don't feel like I need to take a lot of risk anymore to be comfortable at retirement. 8% equivalent is just fine with me. And although I don't want to have to sell, and I do have emergency savings, if very unanticipated events come up I like that's it's easily accessible.