Q. We are in our mid-50s and are both currently unemployed. We have no debts, an almost new home worth about $650,000, other real estate worth about $150,000, and financial assets worth about $4 million (including $1 million in IRA's or other qualified pension plans). We provided our children with good educations and all are now adults in comfortable financial circumstances. It would be nice to leave each of them with a substantial inheritance but that is not our goal.

Our goal is to live our remaining years in comfort. We have spoken with several prospective financial advisors and all seem to think we should be focused on building a large estate or at least protecting ourselves against inflation by investing a substantial part of our financial assets in equities. All want to know how much monthly income we "need." After many years of paying expenses of several children in costly private schools, we could get by on a relatively small amount.

It seems to me that our assets ought to be sufficient to provide us with a very comfortable, risk-free income for the rest of our lives, allowing us to not worry about minimizing our expenses. Is there a reason I should be investing in something other than Treasuries, CD's, and/or tax-free municipals?

---R.M., Dallas, TX


A. There are several reasons that you should have a diversified portfolio that includes a healthy slug of equity investments. The first is a fact of life--- we are living longer. With both of you in your 50's, there is a good chance one of you will live another 40 or perhaps even 50 years. You can check out the probabilities by visiting one of the websites that calculates your life expectancy based on information about your family history, current health, and your living habits.

Things change, particularly their prices. In 1968, only 32 years ago, Fortune magazine featured an article on how "The Good Life Begins At $25,000 A Year." At that level, then, it included country club memberships, imported wine, meals out, the ownership of a luxury car, foreign vacations, and other goodies. Today you'll have trouble making ends meet on the same income and wouldn't even qualify to be a renter in hot markets like San Francisco and New York.

What you need to understand is that there is absolutely no such thing as a risk-free investment. While you are exposed to losing money by investing in stocks, you are exposed to losing purchasing power by investing to keep your principal safe. Either way, your standard of living can decline.

The best protection from an uncertain world is diversification. That means owning more than fixed income investments.

There are also some tax benefits to investing in equities. The maximum Federal Income Tax rate on long-term capital gains is 20 percent, a rate that compares favorably with the 31 to 39.6 percent rate that high earners can pay on dividend and interest income. Add the fact that stocks provide a higher long-term return than fixed income investments and the difference can be substantial.

Suppose, for instance, that you were in the 36 percent tax bracket and invested $1 million in a bond portfolio yielding 6 percent. Your after-tax income would be 3.84 percent or $38,400. If you invested the same $1 million in equities that had no dividends and enjoyed a long term return of 10 percent, your pre-tax income from capital gains would be $100,000 and your spendable income would be $80,000--- more than twice as much as the same $1 million invested in fixed income securities.

Long term, you can make the same level of withdrawals from a diversified account--- about 6 percent---as you can from a fixed income account. The difference is that one will have an income that rises with inflation or faster, while the other will be delivering an assured source of declining purchasing power.