Q. My husband and I will both be 70 this year. We live in Texas and own our home. My husband believes that we should be 100 percent invested in the stock market. I've been investing in Vanguard index-type funds. I have at least $10,000 in several of their index funds that invest in stocks.
We also have some money invested in municipal bonds. We get about $5,000 a month in retirement and Social Security benefits— but my husband is an irrational spender.
Do we have any business being in municipal bonds when our tax bracket seems to be between 10 and 15 percent because of our expenses and donations? Friends ask if we have a financial advisor. We do not, and I doubt that my husband would be willing to consider one. —S.M., Austin, TX
A. Sound investing begins with a careful assessments of risks and benefits. That requires a willingness to do basic arithmetic. Sadly, an enormous number of people in our country just lose it when confronted with arithmetic. Worse, many people hate paying taxes even more than they hate basic arithmetic. Many of those people are the proud owners of municipal bonds or municipal bond funds— even though that ownership won't benefit them in any way.
Here's the basic arithmetic: According to Bloomberg, a well-rated five-year municipal yields 1.18 percent, tax-free. A five-year Treasury yields 1.73 percent, taxable. Divide 1.18 by 1.73 and you get 0.68. So you're getting 68 percent of the yield on a taxable Treasury.
What does that mean? Simply this: Only households that pay income taxes well over the 33 percent rate would benefit in terms of income they can spend or reinvest. Households that pay taxes at a top rate of 15 percent are actually losing spendable income when they invest in tax-free munis of this maturity.
Even at 10-year maturities, municipals aren't a good choice for most people. With a current yield of 2.35 percent, these maturities are yielding only 86 percent of what a taxable Treasury of the same maturity is yielding- so you must be paying at a tax rate over 15 percent to benefit.
Out at 15-years the yields are about equal, so there is some spendable benefit. That said, we haven't given a thought to interest rate risk, credit risk or liquidity. You can get skinned selling a municipal bond but the Treasury market is the most liquid market in the world. Basically, tax-free bonds are useful for very high-income people. Not so useful for the rest of us.
Similarly, people who are very well off- people who can easily pay all their bills and taxes from Social Security, pensions and stock dividends-can afford to be 100 percent invested in stocks. Everyone else needs a safety net in cash, CDs or other fixed income investment.
Even a modest allocation to fixed income can work to "time" the market better than most market timers do. If you have, say, an 80 percent allocation to equities, you'll have to sell some in a major bull market and you'll have to buy some in a major bear market. That can protect you from both the euphoria of a rising market and the paralysis of a sinking market.
Since you are both 70, this is a good time to remind your husband that your savings aren't "play money" any more.
Q. I am currently 67 years old and I am continuing to work. I may work until I am 90. So am I still able to defer income in an IRA after age 70 ½— or when distributions begin must I just begin withdrawing? —D.F., Seattle, WA
A. Once you have reached 70 1/2 you can no longer contribute to an IRA. You must also take required distributions from both IRA accounts and 401(k) accounts at a former employer.
You can, however, continue to contribute to your current employer's 401(k) plan or Roth 401(k) plan. Also, if your income doesn't disqualify you, you can contribute to a Roth IRA.
Finally, if your employer will accept it, you may be able to roll your IRA assets into your current employer's 401(k). Doing that will end the need to make distributions until you no longer work and have rolled your 401(k) assets into an IRA Rollover.