On Suze Orman’s PBS special, she was telling her audience (the US middle and lower classes) that they should be buying 5 year municipal bonds with any money that they have available and want to safely park for the next five years.
While this advice is ordinarily very good counsel for those in the highest Federal and State tax brackets (not Suze Orman’s audience), it makes little sense at all in the current rate structure. And, it absolutely makes no sense for Suze’s target audience.
Here is why: A AAA-rated insured NY municipal bond which matures in 5 years is going to trade at 1.20% at the moment, if you have a broker who can find you one. The fully taxable equivalent for someone who lives in NY City and pays 39% tax (Federal, State and NY City) is about 1.96%. For someone who is in a lower tax bracket, the fully taxable equivalent will be lower. An AAA-rated municipal bond in other high state-tax States like Illinois, California, Massachusetts, Georgia or New Jersey is going to trade roughly at the same level. In States with low taxes, or no taxes, like Florida or Washington, you may be able to find a high quality 5 year municipal bond trading close to 1.50%, but in no case at the moment is a holder going to a fully taxable equivalent more than 2% on a safe municipal bond.
On the other hand, a fully FDIC-insured 5 year Jumbo CD issued by CIT bank currently pays 2.27% APY, and several online banks are offering 5 year CDs with rates as high as 2.25% APY. Those rates are available nationally, but depending on where you live, you may find higher rates on BestCashCow that are offered in a branch by a local banks and credit union near you.
Unlike a municipal bond, the purchase of a CD – online or otherwise – ordinarily involves absolutely nothing in the way of a transaction fee (hidden or otherwise). More importantly, while an investor may think that they do not need access to their money for five years, it is very possible that life circumstances can change and they could need to access it. In the current interest rate environment, an investor could lose significant principal on a new municipal bond purchased today if rates rise (which is something Suze Orman realizes and her reason for cautioning against bond funds at the moment). With a CD, that investor would only face an early withdrawal penalty, expressed in terms of interest although it may affect principal in the event of an extremely early withdrawal. The CIT Bank and Synchrony Bank penalties for earlier withdrawal on a 5 year CD, for example, are only 12 months and 6 months, respectively.
Suze Orman’s advice is generally very good. But, in recommending municipal bonds, she is wrong because she is not aware of the current bond and CD rates. You can always remain up on the rates by checking them here.