How the Ultra-Rich Use Municipal Bonds in Retirement

For the ultra-wealthy, municipal bonds aren’t just about earning interest. They’re a way to lock in tax-free income, cover essential expenses, and free up the rest of their portfolio for higher-growth investments.

But even though muni bonds may offer stable income, they aren’t a perfect fit for every retiree, and they come with risks that are easy to overlook.

Why the Wealthy Turn to Municipal Bonds

One major reason municipal bonds are popular with wealthy retirees? Taxes. “Municipal bonds can provide stable, high-quality, tax-free income,” says Noah Damsky, founder of California-based Marina Wealth Advisors, noting that they’re federally tax-free, but only occasionally state tax-free.

For example, munis may be exempt from state and local taxes if you live in the state where the bond is issued.

Reducing taxable income can make a huge difference for those in higher brackets, making munis a smart way to protect wealth without giving more away to taxes.

Plus, the relatively stable nature of many muni bonds—especially general obligation bonds backed by a government taxing authority (instead of revenue from a given project)—makes them an attractive way to fund day-to-day living expenses in retirement.

Risks and Common Pitfalls to Avoid

Despite their reputation for safety, municipal bonds aren’t foolproof. “While they’re often high quality, they’re not without risk,” Damsky cautions. “They can carry a substantial amount of interest rate risk and some credit risk.”

Liquidity is another concern many investors miss. “They can be hard to sell at a good price in big blocks, especially if the market is stressed,” Damsky says.

What’s more, buying the wrong type of muni can even trigger an unexpected tax bill—a surprise many retirees aren’t prepared for.

For example, if you buy a private activity bond, and your income is high enough, the interest might be subject to the alternative minimum tax (AMT).

If you’re looking for additional safe options for cash management, you also might want to explore high-yield savings accounts for flexible, FDIC-insured savings.

Why Home-State Bonds Aren’t Always Best

Many high-net-worth investors buy municipal bonds issued only in their home state to avoid paying state income taxes on interest earned, noted Damsky.

But concentrating too heavily can backfire. “While these bonds can be high quality, concentration in one particular state is not optimal,” he said.

Economic or political problems in one state could hit your portfolio harder than you expect. Diversification still matters—even for bonds that seem safe.

How the Ultra-Wealthy Structure Their Portfolios

For the ultra-rich, muni bonds aren’t the whole game plan. They’re often part of a bigger strategy to create a growth and income portfolio that relies on assets like alternatives too.

“I find that the ultra-wealthy like to barbell their portfolios,” Damsky explains. “They want to have their safe money in high-quality fixed income, and have their assets beyond living expenses in high-growth investments such as private equity, private infrastructure, and venture capital.”

Once they feel confident that they have secured their lifestyle with conservative investments, they turn to high-growth investments to continue to build generational wealth, he adds.

This approach effectively gives them a stable income while they pursue long-term growth.

When Munis Might Not Make Sense

If you’re trying to build wealth aggressively in retirement—not just to preserve it—relying heavily on munis might not be the best move.

“Municipal bonds can be great for sustaining existing wealth, but they are unlikely to compound wealth over the long term,” Damsky says.

That’s because, as fixed-income securities, they offer income, not capital appreciation.

Munis can be a powerful investment tool—but like any tool, they’re only right when they fit the job you’re trying to accomplish.

The Bottom Line

The ultra-wealthy use municipal bonds to create a reliable foundation of generally tax-free income, covering their essential needs while investing boldly elsewhere.

But muni bonds aren’t risk-free, and they’re not a one-size-fits-all investing solution. Understanding how they work and when they don’t can help you build a retirement plan that fits your goals.