By Scott Burns

Q. We're a couple in our late 80s. We think we're in decent shape financially, but have a few doubts. We have about $185,525 in corporate and muni bonds. About 30 percent are taxable and 70 percent tax- exempt. The interest rates on the bonds range from 5 percent to 6.35 percent. We have a whole life insurance policy with long-term care benefits. It has a surrender value of $131,213. We also have $34,300 in I Savings bonds and about $25,000 in cash. We have no debt other than current credit card. We pay all bills paid monthly. We own our house and cars debt-free.

Are we too heavy in bonds? The actual market value of our bonds is several thousand less than the original cost. With the market looking as it is, will we continue to lose? Our interest income has been good, but we won't live long enough to see any of the bonds mature.

Our current income consists of Social Security, a moderate pension, an annuity and some interest. —W.H., Meadowlakes, TX

A. Due to the deficits that many states and municipalities are facing, you have an uncomfortable amount of both credit and maturity risk in your tax-free bonds. It also doesn’t make a lot of sense to own tax-free bonds when, in fact, you don’t have a lot of taxable income.

Unfortunately, selling the bonds would also mean a big drop in interest income. But you would probably sleep better if you could reduce the level of risk you are facing. One way to do this is with a term tax-deferred annuity. This is basically a loan that you make to the insurance company. Then the insurance company makes monthly payments to you, in principal and interest, for the term of the annuity.

Selling the tax-free bonds and replacing them with, say, a 5 year term annuity, would give you regular monthly income. If you spent it all you would be spending some of your principal but (a) you would still have your other assets, (b) any money not spent could be added to your other assets, and (c) you’ve already covered the long term care contingency pretty well.

The most important thing to consider here is that yield on your investments is entirely secondary to risk. It’s OK to spend principal when you are in your late 80s. If both of you were 85 years old the odds are that both of you will be alive for 4.2 years while one will live for 9.6 years. If both of you were 90 years old, the odds are that both of you will be alive for 2.9 years and one of you will live for 7.1 years. These figures are based on the 1983 mortality tables used for the online life expectancy calculators at www.72t.net.

You can get an idea of the possible monthly payments by visiting www.immediateannuities.com Be prepared for a very low yield on your money. On a recent visit I found that a 5-year term annuity would pay $1,022 a month. That’s a total of $61,320 over 60 months, so you would only earn interest of $1,320. That calculates to a yield of about 0.85 percent.

Another option would be to accept getting a nominal yield and simply arrange for regular monthly payments of principal from a savings account at that thrift institution or credit union. If the low yields bother you just remember this, the Federal Reserve has pledged the earning power of your savings and those of every other Solvent Senior for a wonderful cause— making America safe and secure for banks.

Q. I am a 67-year-old single female (68 in June). I am employed full time with a modest but adequate income. I have no plans to retire in the immediate future. Would it be best to start drawing Social Security while I am still employed? Or would I benefit by waiting until I am no longer working? I have limited savings, so Social Security will be my primary source of income when that time comes. If I draw Social Security, would it be taxable?—J.B., Los Angeles, CA

A. Depending on your earned income, you may pay little or nothing in taxes on your Social Security benefits, if you take them now. To maximize future income you should continue to defer benefits. If building your investments is more important, you should take benefits now and invest them.