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Dear groanup,

If you think that those who live off their investments only have tax-free bonds, then you really need to do a little research.

As well, if you have enough income, a lot of the income from those "tax-free" bonds becomes taxable. LOL. Over the last number of years, the range of "tax-free" bonds that remain tax-free to high income folks has been narrowed. The income from lots of tax-free bonds is now subject to the Alternative Minimum Tax (AMT).

Here's a quote from a link:

"Many investors buy municipal bonds because the income isn't subject to regular income tax. But investors should be aware that municipal 'private activity' bonds issued to help finance private-sector projects, such as stadiums or airports, are subject to AMT."

http://www.reformamt.org/articles/baltimore_sun.txt

I don't remember the rules, but I believe that general revenues bonds are AMT-exempt, where as the more restricted bonds that fund specific initiatives that are not strictly about building schools, public libraries, roads, bridges, and the like, are not. I've pinged some folks who probably know lots more than me about it.

I just perused a list of 128 currently-available municipal bonds, and most seem to fall into the "private activity" category.

But it doesn't matter. No one with, say, $10 million to invest is just going to buy tax-free bonds. Munis would be a small part of their portfolio. The returns are insufficient (right now, they appear to be around 3% - 4% per annum), and just don't protect against inflation.

If you're not getting an overall return of at least 7% or so on your financial assets, you can't both live on a significant portion of the income generated AND protect against inflation.

Most folks with that kind of money invest in various types of equities, some bonds, some other types of debt instruments, and real estate. Investment in equities will yield a total return, on average, of around 10% annually, for the long-haul.

The typical financial advisor to the rich will say, okay, invest your $10 million, buy some bonds, some other stuff, but buy mostly equities, so that you'll achieve an overall return of about 8% - 8.5%. Live on 4%, and let your capital grow, in nominal terms, by the other 4% - 5%. That way, you live comfortably now, and you protect against inflation later.

How do I know this? Because I've discussed with my own financial advisors how I will generate a living off my own financial assets when I sell my business.

"Your example doesn't account for that 'old' money class."

Well, it isn't an "example." It's actually the entire universe of rich folks. The simple fact is that on average, the top 1% pay 27.5% of their income in federal income tax.

If you don't like the facts, I can't help you. I can't change them. Neither can you.

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