A good number of people end up retiring with more than just Social Security to fall back on. And that’s a positive thing, since Social Security only pays the average retired worker today a little more than $2,000 a month.
Now there are several different ways you can supplement your Social Security income in retirement. One option is to set up a CD ladder with guaranteed interest payments. However, this strategy only works well when interest rates are strong.
Another option is to maintain a portfolio of growth and dividend stocks. But that could introduce an element of risk you aren’t particularly comfortable with.
Plus, if you earn dividend income from a stock portfolio, it may be subject to taxes. The same holds true for interest you earn from CDs.
One type of bond, however, could give you access to steady interest income that won’t increase your tax bill. Interested? Let’s dive in so you can learn more.
Why it pays to invest in municipal bonds in retirement
If you’re looking for a great way to supplement your Social Security benefits without taking on a huge amount of risk or increasing your federal tax bill, then it pays to look at municipal bonds.
Municipal bonds are issued by states, cities, and other public entities. They’re generally used to fund public projects, like schools and roadways.
Some municipal bonds are tied to a specific revenue stream that’s used to repay bondholders. If municipal bonds are issued to build a bridge, for example, the tolls that are collected from drivers can be used to pay investors.
One major benefit of investing in municipal bonds is that the interest they pay is always tax-exempt at the federal level. And if you buy bonds issued by your state of residence, you may not have to pay any state or local tax on that interest income, either.
Of course, one thing to consider is that municipal bonds tend to pay less interest than corporate bonds. But they can make sense for retirees in a certain tax bracket looking to reduce their IRS burden.
Another great thing about municipal bonds is that offer predictability. Interest is generally paid twice a year, and municipal bonds have a very low default rate, historically speaking.
Since municipal bonds are used to finance public projects, it’s important that they offer investors little risk, especially given that they tend to pay less interest than corporate bonds. So local governments tend to do everything in their power to avoid defaulting on them.
Should you consider municipal bonds in retirement?
Although municipal bonds aren’t your only option for supplementing your Social Security checks, you may want to consider them if:
- You like the idea of steady income
- You’re worried about taxes
- You don’t like to take on a lot of risk as an investor
Even if you’re getting a pretty nice monthly payday from Social Security, chances are, it won’t be nearly enough to allow you to live the lifestyle you’re hoping for. Municipal bonds could be a great way to bridge that gap and give you the financial peace of mind you’re after in retirement.
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