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Q

My compliments on your excellent article, “Avoid Headline Hysteria.” I would add one supporting observation: An advisor with a nationally syndicated radio show, whom I otherwise respect, repeatedly advises his radio listeners to avoid long-term municipal bonds because their market value will decline when interest rates rise. At the same time, in the same broadcast, he will tout lifetime fixed annuities from insurance companies as a sound part of some retirement income strategies. Am I missing something here? A long-term muni bond fills the same place in the retirement portfolio as a fixed annuity, can be 100% tax free and can be sold if emergency lump-sum cash is needed or if the owner dies and leaves the bond to his heirs. A fixed annuity is entirely illiquid and is only partially tax-free. There are a menagerie of provisions for heirs, but they all reduce the return to annuitant. And those fixed annuity payments are no less vulnerable to inflation than are the bond coupon payments. AAA-rated long-term munis are available with better than 5% tax-free returns. It’s hard to find a fixed annuity that does as well, and none of them offer the full return of principal at maturity that the bond does. Do I have all this right? I can’t see any case where one would prefer a lifetime fixed annuity to a long-term muni bond.

A

James A. Klotz responds:

Thank you for your kind words. In answer to your question, we don’t think you are missing anything in your analysis of municipal bonds vs. annuities. In fact, we couldn’t agree more with your assessment.

Municipal bonds are considerably more flexible. At the risk of piling on, annuities are also one of the highest commission products in the investment marketplace, and can result in unexpected taxable events, as well as substantial penalties for early withdrawal.