Short-term muni bonds

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dave_5
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Short-term muni bonds

Post by dave_5 »

I am not a bond person, but I'm asking this question for my 80 yr. old father. He had wanted to go into individual stocks with high dividends, but thankfully I was able to talk him out of it.

I was looking at the Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX). I think there was another short-term municipal bond fund. I want him to be diversified and provided him a formula to determine whether these kinds of municipal funds beat more conservative yielding taxable "investments" like CD's, which he has a lot of, but in an increasingly inflationary environment especially I consider them essentially "dead money."

I am a little bit concerned there is tax uncertainty at this point and am also concerned about proposed tax rates on long-term capital gains among other things. In past conversations I have urged my Dad to see how current legislation shakes out, but with him being well into his golden years I am worried about his purchasing power in the current market.

Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
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anon_investor
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Re: Short-term muni bonds

Post by anon_investor »

dave_5 wrote: Tue Jun 22, 2021 11:40 am I am not a bond person, but I'm asking this question for my 80 yr. old father. He had wanted to go into individual stocks with high dividends, but thankfully I was able to talk him out of it.

I was looking at the Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX). I think there was another short-term municipal bond fund. I want him to be diversified and provided him a formula to determine whether these kinds of municipal funds beat more conservative yielding taxable "investments" like CD's, which he has a lot of, but in an increasingly inflationary environment especially I consider them essentially "dead money."

I am a little bit concerned there is tax uncertainty at this point and am also concerned about proposed tax rates on long-term capital gains among other things. In past conversations I have urged my Dad to see how current legislation shakes out, but with him being well into his golden years I am worried about his purchasing power in the current market.

Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
What tax bracket is your father in? Muni's only make sense if you are in a high tax bracket. Interest rates are so low right now the 0.5% offered by popular FDIC insured online savings accounts (e.g. Ally, Marcus, etc.) are probably better options than a short term bond fund. FYI VTEAX is not a short term bond fund, it would be considered intermediate.
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dave_5
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Re: Short-term muni bonds

Post by dave_5 »

anon_investor wrote: Tue Jun 22, 2021 11:44 am
dave_5 wrote: Tue Jun 22, 2021 11:40 am I am not a bond person, but I'm asking this question for my 80 yr. old father. He had wanted to go into individual stocks with high dividends, but thankfully I was able to talk him out of it.

I was looking at the Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX). I think there was another short-term municipal bond fund. I want him to be diversified and provided him a formula to determine whether these kinds of municipal funds beat more conservative yielding taxable "investments" like CD's, which he has a lot of, but in an increasingly inflationary environment especially I consider them essentially "dead money."

I am a little bit concerned there is tax uncertainty at this point and am also concerned about proposed tax rates on long-term capital gains among other things. In past conversations I have urged my Dad to see how current legislation shakes out, but with him being well into his golden years I am worried about his purchasing power in the current market.

Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
What tax bracket is your father in? Muni's only make sense if you are in a high tax bracket. Interest rates are so low right now the 0.5% offered by popular FDIC insured online savings accounts (e.g. Ally, Marcus, etc.) are probably better options than a short term bond fund. FYI VTEAX is not a short term bond fund, it would be considered intermediate.
We don't talk a lot about money, because it makes him feel uncomfortable, but I know he's in an upper income bracket and takes the standard deduction, which is set to be lowered pending an ongoing legislation, but he almost never buys and sells stocks. I am concerned he is keeping too much in cash and CD's rates are slow low and unlike other kinds of investments you're rate is locked, there are some variable ones, but I haven't seen any of those in a long time. I don't want to tell him wrong, because medical issues might come up and he needs a means to pay for them. So, far my parents are relatively healthy, but I am concerned. I'm think the Vanguard balanced fund might almost be a better choice for him.
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dave_5
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Re: Short-term muni bonds

Post by dave_5 »

anon_investor wrote: Tue Jun 22, 2021 11:44 am
dave_5 wrote: Tue Jun 22, 2021 11:40 am I am not a bond person, but I'm asking this question for my 80 yr. old father. He had wanted to go into individual stocks with high dividends, but thankfully I was able to talk him out of it.

I was looking at the Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX). I think there was another short-term municipal bond fund. I want him to be diversified and provided him a formula to determine whether these kinds of municipal funds beat more conservative yielding taxable "investments" like CD's, which he has a lot of, but in an increasingly inflationary environment especially I consider them essentially "dead money."

I am a little bit concerned there is tax uncertainty at this point and am also concerned about proposed tax rates on long-term capital gains among other things. In past conversations I have urged my Dad to see how current legislation shakes out, but with him being well into his golden years I am worried about his purchasing power in the current market.

Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
What tax bracket is your father in? Muni's only make sense if you are in a high tax bracket. Interest rates are so low right now the 0.5% offered by popular FDIC insured online savings accounts (e.g. Ally, Marcus, etc.) are probably better options than a short term bond fund. FYI VTEAX is not a short term bond fund, it would be considered intermediate.
What about Vanguard Short-Term Bond Index Fund Admiral Shares (VBIRX)?
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anon_investor
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Re: Short-term muni bonds

Post by anon_investor »

dave_5 wrote: Tue Jun 22, 2021 12:04 pm
anon_investor wrote: Tue Jun 22, 2021 11:44 am
dave_5 wrote: Tue Jun 22, 2021 11:40 am I am not a bond person, but I'm asking this question for my 80 yr. old father. He had wanted to go into individual stocks with high dividends, but thankfully I was able to talk him out of it.

I was looking at the Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX). I think there was another short-term municipal bond fund. I want him to be diversified and provided him a formula to determine whether these kinds of municipal funds beat more conservative yielding taxable "investments" like CD's, which he has a lot of, but in an increasingly inflationary environment especially I consider them essentially "dead money."

I am a little bit concerned there is tax uncertainty at this point and am also concerned about proposed tax rates on long-term capital gains among other things. In past conversations I have urged my Dad to see how current legislation shakes out, but with him being well into his golden years I am worried about his purchasing power in the current market.

Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
What tax bracket is your father in? Muni's only make sense if you are in a high tax bracket. Interest rates are so low right now the 0.5% offered by popular FDIC insured online savings accounts (e.g. Ally, Marcus, etc.) are probably better options than a short term bond fund. FYI VTEAX is not a short term bond fund, it would be considered intermediate.
We don't talk a lot about money, because it makes him feel uncomfortable, but I know he's in an upper income bracket and takes the standard deduction, which is set to be lowered pending an ongoing legislation, but he almost never buys and sells stocks. I am concerned he is keeping too much in cash and CD's rates are slow low and unlike other kinds of investments you're rate is locked, there are some variable ones, but I haven't seen any of those in a long time. I don't want to tell him wrong, because medical issues might come up and he needs a means to pay for them. So, far my parents are relatively healthy, but I am concerned. I'm think the Vanguard balanced fund might almost be a better choice for him.
To be honest, you probably should better understand your parents' entire portfolio before you give any kind of recommendations.
Topic Author
dave_5
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Re: Short-term muni bonds

Post by dave_5 »

dave_5 wrote: Tue Jun 22, 2021 12:07 pm
anon_investor wrote: Tue Jun 22, 2021 11:44 am
dave_5 wrote: Tue Jun 22, 2021 11:40 am I am not a bond person, but I'm asking this question for my 80 yr. old father. He had wanted to go into individual stocks with high dividends, but thankfully I was able to talk him out of it.

I was looking at the Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX). I think there was another short-term municipal bond fund. I want him to be diversified and provided him a formula to determine whether these kinds of municipal funds beat more conservative yielding taxable "investments" like CD's, which he has a lot of, but in an increasingly inflationary environment especially I consider them essentially "dead money."

I am a little bit concerned there is tax uncertainty at this point and am also concerned about proposed tax rates on long-term capital gains among other things. In past conversations I have urged my Dad to see how current legislation shakes out, but with him being well into his golden years I am worried about his purchasing power in the current market.

Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
What tax bracket is your father in? Muni's only make sense if you are in a high tax bracket. Interest rates are so low right now the 0.5% offered by popular FDIC insured online savings accounts (e.g. Ally, Marcus, etc.) are probably better options than a short term bond fund. FYI VTEAX is not a short term bond fund, it would be considered intermediate.
What about Vanguard Short-Term Bond Index Fund Admiral Shares (VBIRX)?
My mistake, I meant Vanguard Short-Term Tax-Exempt Fund Investor Shares (VWSTX). Any ideas?
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grabiner
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Re: Short-term muni bonds

Post by grabiner »

dave_5 wrote: Tue Jun 22, 2021 12:10 pm My mistake, I meant Vanguard Short-Term Tax-Exempt Fund Investor Shares (VWSTX). Any ideas?
This is almost an ultrashort fund, with a one-year duration (and a very low yield reflecting the very low risk). The Vanguard muni equivalent to its short-term taxable funds is Limited-Term Tax-Exempt, which usually has duration 2-3 years (currently 2.3).
Wiki David Grabiner
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anon_investor
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Re: Short-term muni bonds

Post by anon_investor »

dave_5 wrote: Tue Jun 22, 2021 12:10 pm
dave_5 wrote: Tue Jun 22, 2021 12:07 pm
anon_investor wrote: Tue Jun 22, 2021 11:44 am
dave_5 wrote: Tue Jun 22, 2021 11:40 am I am not a bond person, but I'm asking this question for my 80 yr. old father. He had wanted to go into individual stocks with high dividends, but thankfully I was able to talk him out of it.

I was looking at the Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX). I think there was another short-term municipal bond fund. I want him to be diversified and provided him a formula to determine whether these kinds of municipal funds beat more conservative yielding taxable "investments" like CD's, which he has a lot of, but in an increasingly inflationary environment especially I consider them essentially "dead money."

I am a little bit concerned there is tax uncertainty at this point and am also concerned about proposed tax rates on long-term capital gains among other things. In past conversations I have urged my Dad to see how current legislation shakes out, but with him being well into his golden years I am worried about his purchasing power in the current market.

Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
What tax bracket is your father in? Muni's only make sense if you are in a high tax bracket. Interest rates are so low right now the 0.5% offered by popular FDIC insured online savings accounts (e.g. Ally, Marcus, etc.) are probably better options than a short term bond fund. FYI VTEAX is not a short term bond fund, it would be considered intermediate.
What about Vanguard Short-Term Bond Index Fund Admiral Shares (VBIRX)?
My mistake, I meant Vanguard Short-Term Tax-Exempt Fund Investor Shares (VWSTX). Any ideas?
A high yield online savings account (e.g. Ally, Marcus) would likely be safer/better and offer higher after tax yield.
venkman
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Re: Short-term muni bonds

Post by venkman »

dave_5 wrote: Tue Jun 22, 2021 11:40 am Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
You said in a response on this thread that your father is retired and in an upper income bracket. If he's pulling in that much money, is there really significant cause for concern?

If you could estimate his annual income, annual expenses, and current portfolio size, we could give better advice.
Topic Author
dave_5
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Re: Short-term muni bonds

Post by dave_5 »

venkman wrote: Tue Jun 22, 2021 10:31 pm
dave_5 wrote: Tue Jun 22, 2021 11:40 am Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
You said in a response on this thread that your father is retired and in an upper income bracket. If he's pulling in that much money, is there really significant cause for concern?

If you could estimate his annual income, annual expenses, and current portfolio size, we could give better advice.
My family and I are very thrifty, still looking for sales and clipping coupons. My parents are self-made millionaires who live off their pensions and social security and don't have to touch their nest egg. Regular 401k's and IRA's (not Roth). Have no idea the tax bracket, but they have no deductions on federal or state other than the standard deduction and do not itemize. Under the new tax proposal long-term capital gains taxes could be as high as 40% if you're at the top of the income spectrum as well as the surcharges for the ACA.

Earlier, I had given my Dad a formula for figuring out whether or not he comes out ahead with muni's, which I suspect he does. My inclination is to suggest he invest in the short-term municipals that should adjust up as interest rates increase. He lives in Virginia and would still owe the standard 5.75% state income tax, as far as I know there are no local income taxes as of yet, but that may change as some point. What do you think of all this? I put him with Vanguard.
UpperNwGuy
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Re: Short-term muni bonds

Post by UpperNwGuy »

If it ain't broke, don't fix it.

From what you've told us:
— Your parents have pensions and social security to cover living expenses.
— They're also millionaires (and I'm assuming that you're not including the value of the pensions and social security in that calculation).
— They're conservative with their money.

I'd leave well enough alone, or go with a high yield savings account. Not sure why you keep circling back to municipal bond funds.
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anon_investor
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Re: Short-term muni bonds

Post by anon_investor »

UpperNwGuy wrote: Wed Jun 23, 2021 5:26 am If it ain't broke, don't fix it.

From what you've told us:
— Your parents have pensions and social security to cover living expenses.
— They're also millionaires (and I'm assuming that you're not including the value of the pensions and social security in that calculation).
— They're conservative with their money.

I'd leave well enough alone, or go with a high yield savings account. Not sure why you keep circling back to municipal bond funds.
+1.
venkman
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Re: Short-term muni bonds

Post by venkman »

dave_5 wrote: Wed Jun 23, 2021 5:11 am
venkman wrote: Tue Jun 22, 2021 10:31 pm
dave_5 wrote: Tue Jun 22, 2021 11:40 am Are short-term muni's a sound choice in the current market or are a mix of stocks and bonds more suitable? IMHO because he is essentially well into retirement and on fixed income, I'd be lying if I said I wasn't concerned about his financial well being.
You said in a response on this thread that your father is retired and in an upper income bracket. If he's pulling in that much money, is there really significant cause for concern?

If you could estimate his annual income, annual expenses, and current portfolio size, we could give better advice.
My family and I are very thrifty, still looking for sales and clipping coupons. My parents are self-made millionaires who live off their pensions and social security and don't have to touch their nest egg. Regular 401k's and IRA's (not Roth). Have no idea the tax bracket, but they have no deductions on federal or state other than the standard deduction and do not itemize. Under the new tax proposal long-term capital gains taxes could be as high as 40% if you're at the top of the income spectrum as well as the surcharges for the ACA.

Earlier, I had given my Dad a formula for figuring out whether or not he comes out ahead with muni's, which I suspect he does. My inclination is to suggest he invest in the short-term municipals that should adjust up as interest rates increase. He lives in Virginia and would still owe the standard 5.75% state income tax, as far as I know there are no local income taxes as of yet, but that may change as some point. What do you think of all this? I put him with Vanguard.

We're talking about taxable money outside of the retirement accounts, right? Currently, Vanguard's Limited Term Tax Exempt muni fund (VMLTX) has an SEC yield of 0.31%. If your combined net tax rate was 50%, a fully taxable investment would only need to return 0.60% to outperform VMLTX on an after-tax basis. 5-year Treasuries are yielding 0.90% right now and are exempt from state tax. A 5-year MYGA (multi-year guaranteed annuity) from an A++ rated company yields 2.25% and offers deferral of all taxes until the end of the term.

The goal shouldn't be to minimize taxes, but to maximize after-tax return.
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