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Long Term Zero Coupon Municipal Bonds - Questions

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  • Long Term Zero Coupon Municipal Bonds - Questions

    Some of these are available and hovering in the 5-6.7% return range. Since they are municipal, I assume they have a very low default rate. Can these be purchased with goal amounts for retirement on an annual basis? For example, if I find a Zero that has a 20-year term, and a rate of 6% (not bad), and want a $300,000 bond payment at term, it would cost me around $100,000 now for a guaranteed return over the next 20 years - just waiting for my retirement. This would amount to around 25% of my total annual retirement contributions, effectively leaving the remaining 75% to be invested in balanced equities outside of fixed income vehicles. Also, as I get older, my bond allocation would increase, allowing me to buy increasingly larger bond amounts to maintain inflationary changes.

    With this strategy, the bonds alone would fully fund my anticipated retirement needs, and the remaining 75% of my investment portfolio would be gravy...

    How would I assess the risk for this strategy, and also, would it be possible to invest into one of these through a 529 plan for my newborn daughter's college tuition?

  • #2
    Where are you seeing these bonds at these yields; probably below investment grade


    • #3
      I've seen them several places - investment grade no junk.  Don't have them on hand.


      • #4
        seriously doubt it   probably states in trouble


        • #5
          Assuming you can get them at the rates you state, and that they are indeed high quality bonds, and you indeed can put A LOT of money into them such that they make sense, then sure your idea should work. People do TIPS ladders like this all the time.

          There are several risks- default risk is huge. Inflation risk is also not insignificant. Reinvestment risk matters too. Interest rate risk/volatility for any period less than 30 years will be huge. But if 75% of your portfolio is in something else, that seems manageable.

          Why would you buy munis in a tax protected account like a 529? No, I don't know of a 529 that lets you buy individual bonds.
          Helping those who wear the white coat get a fair shake on Wall Street since 2011


          • #6
            2,000,000 in laddered tax free municipals paying an average of around 5% that I have been accumulating since the late 80's.   That's 100,000 in tax free income every year irregardless of what the stock market is doing.  Why would I shoot for  a 1 or 2 % more yield?  Taxable equivalent.    Not retired as of yet  so this will continue to compound, but having a guaranteed income of $100,000 a year, tax free seems like a good model to me.  Please feel free to shoot holes in this scenario.


            • #7
              I like it personally. You are doing individuals? Im currently only in funds. Theres no need to reach for anything over 5%, at the tax equivalent rate thats a 7-9% tax equivalent yield depending on your fed/state levels. Thats good stuff.


              • #8
                Zeros often report tax on the "phantom" accumulation accrued annually. There is also the AMT portion to consider. That was the reasoning for the 529 plan.


                • #9
                  Yes using individuals and holding to maturity.  Only downside is when they mature and you want to reinvest, you are held to whatever the going rate may be at the time.  I sometimes have to buy premium bonds but  I know that I am buying for income and only purchase high quality G.O. bonds. I have been getting around 5 % consistently.  0 default , knock on wood, in close to 30 years of using this strategy.


                  • #10
                    Thats whats great about munis, default rates are exceedingly low, only treasuries are safer than G.O. bonds, and they are not priced as if thats the case.


                    The slippage has always bothered me for individuals, but someday I may do that method.