Tips For Municipal Bonds

by Alan Lavine and Gail Liberman

Municipal bonds can be great if you need tax-free income. They’ve long been considered among the safest investments. Reason: governments can’t go out of business.

They typically can negotiate with creditors and use their taxing power to cover debts.

But lately, some cities have been facing serious budget problems. Many city and state governments face mounting under funded pension plans and/or health care expenses. 

If you own a municipal bond and its issuer is troubled, its credit rating and price could drop.

So what can you do to protect yourself?

• Stick only with the financially strongest issuers that are rated triple A by Standard & Poor’s. You also can invest in insured municipal bonds, which are insured against default by insurance companies, such as MBIA and AMBAC.
• Stick with bonds backed by specific revenues. Examples:  Water and sewer utilities or toll roads. Avoid bonds backed by the taxing authority of the city, county or state.
• Avoid states that are troubled by specific industry problems.
• Beware that with bond mutual funds, bond prices can fall as rates rise, so you could lose principal.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.