This week I’m talking about tax-free bonds. 

Today I’m talking about the changing landscape of tax-free bonds, and why investing in tax-free bonds is a lot different than it was 10, 20, 30+ years ago.

My dad has been a financial advisor for almost 40 years. When he started as an advisor in 1982, interest rates were a lot higher than they are today. And one of my favorite stories he told me was about a client he used to call from time to time to pitch bonds to. 

Back in the early 80s you could by a 30 year tax-free bond that paid 8%. Can you imagine if you had the opportunity to lock in a tax-free interest rate of 8% on your money for 30 years? It’s amazing. But of course inflation was higher back then too and rates were going up. 

This particular client balked and said “call me back when rates get to 10%”. Well, rates didn’t get to 10% and that 8% is looking pretty sweet now. 

Rates today on tax free municipal bonds are much lower. You’re lucky to get 3% right now on a tax-free bond and for the most part, rates on these bonds are in the 1-2% range. Wah wah…

So bond interest rates in general and especially tax-free bonds just aren’t as attractive or compelling as they once were. 

The other problem with tax-free municipal bonds that I see today is that especially since the financial crisis in 2008, a lot of local city, county, and state governments have frankly done a poor job of managing their finances. So you have to be a lot more careful these days with the bonds you invest in, so you’re not stuck holding a bond when the government can no longer pay you the interest you’re owed. 

But as I discussed earlier in the week, that doesn’t mean you should ignore tax-free bonds. They’re still a compelling investment option, especially if you’re in a high tax-bracket. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.

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