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Investing Specialists

Affluent Retirees: Don't Rule Out Taxable Bonds

Even modest taxable exposure can help smooth a muni portfolio's performance.

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Affluent retired readers know the drill: When withdrawing money from a portfolio to pay living expenses, it's best to start with taxable accounts first, to preserve the tax-saving benefits of IRAs and company retirement plans for as long as possible. And what to keep in those taxable accounts if you expect to tap your capital soon? Municipal bonds, of course, because their income is generally free from federal income taxes and might be free of state and local taxes, too.

That's not a bad rule of thumb. But should your whole taxable fixed-income portfolio consist of munis? Maybe not. Even though you can diversify geographically with municipal bonds, and you can also spread your muni portfolio across securities with varying credit qualities and levels of interest-rate sensitivity, it's wise to consider more than just munis for your taxable bond portfolio, especially if you're retired and actively tapping the money in your account for living expenses.

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.