None of our retirement investments are in municipal bond and funds. This is a deliberate decision on our part. I wrote about the questionable future of muni bonds eighteen months ago. Conditions may become worse.
How can things be worse? As a recent article points out, the “stigma” against municipal bankruptcies seems to be fading away. Two large cities in California – Stockton and San Bernardino – have recently filed bankruptcy. More are likely to follow, to shed themselves of oppressive union contracts and crushing pension obligations. Holders of general obligation municipal bonds are at risk of losing their investment when this happens.
The primary reason for holding municipal bonds is tax avoidance. In the present economy, this benefit does not provide a sufficient risk premium in my opinion. I would rather own a less risky taxable investment inside a tax-deferred retirement account.
Generally, I’m not a follower of Warren Buffet’s investment advice because as a multi-billionaire, he can take risks that the rest of us cannot. But when Buffet is talking down municipal bonds, I pay attention.
Here is the article that talks about the risks.