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By Adam Zoll and Christine Benz | 04-17-2014 11:00 AM

Retirees: Run the Numbers on Munis

Even after solid year-to-date performance, munis still look attractive on a tax-adjusted basis for those in higher brackets. Plus: 401(k) fee recoveries and help for difficult planning conversations.

Adam Zoll: For Morningstar, I'm Adam Zoll, and welcome to The Retirement Radar. Many investors turned their backs on municipal bonds in 2013, but that may have been a mistake. Here to talk about these and other developments of interest to retirees is Christine Benz, Morningstar's director of personal finance.

Christine, thanks for being with us.

Christine Benz: Adam, it's great to be here.

Zoll: What has driven this rebound in muni bonds since these scares in 2013? We heard about Detroit; we heard about Puerto Rico. But where do things stand now?

Benz: One of the big drivers of muni bonds' relatively strong performance so far in 2014, Adam, has been the fact that we've seen interest-rate worries ebb away. A lot of municipal-bond issuance is long-term. That means that many of these bonds were pretty beaten down in 2013 because of interest-rate worries. They have come back nicely as interest-rate worries have abated.

We've seen really strong performance from certainly long-term muni-bond categories. We've also seen strong performance from some of the more credit-sensitive categories. We've got this category of high-yield muni funds that has returned about 6% so far this year, whereas the typical intermediate-term muni fund has returned about 3% this year, which is decent, too. So strong performance across the board, but especially with longer-duration and/or credit-sensitive bonds.

Zoll: For investors who still are interested in muni bonds, is it too late to get in on this, or are there still opportunities out there?

Benz: I think when you look at munis today, you're probably not seeing the screaming buys that were there at the end of 2013 and coming into 2014. But I do always urge investors to run the numbers; use Morningstar's bond calculator to look at the yields of a muni investment versus a taxable-bond investment.

I looked this morning, there are couple of funds that I like to compare with one another, one a taxable-bond fund, one of muni-bond fund. Right now if you're in the 25% tax bracket, it's roughly a wash in terms of where the yield advantage is. But if you're in the tax bracket above that level, or if you're well above that level, you will see a good bump up in your yield by investing in the muni fund versus the taxable fund.

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