Q. Which would be better, purchasing EE Savings Bonds or creating a 5 year Treasury Ladder?   I will be purchasing either from a non-tax deferred account using Treasury Direct. My understanding is that I can get EE Bonds that will return 90 percent of the trailing 6 months' yield on 5 Year Treasury notes and that this interest is tax-deferred.

The 5-Year Treasury note ladder will not be tax deferred. How do you think these two options compare? I am planning to use either option as the conservative portion of my retirement portfolio. I am 34 years old and am thinking of a conservative 30 percent bond, 70 percent equity portfolio.

---A.F., by e-mail from Dallas


A. While the tax-deferred EE Savings Bonds are a good alternative to a taxable 5 year Treasury ladder for an account that is accumulating, a still better choice is available--- I Savings Bonds. These earn at a tax-deferred rate that is changes every six months plus the rate of inflation. This means your money is protected from inflation (at least pre-tax) and can mean higher yields. Currently, for instance, I Savings Bonds are yielding 4.66 percent. That's a good deal more than the 2.66 percent yield on EE Savings Bonds.


Q. I am a healthy 51 years old and people in my family tend to live into their 90s. I have a great life, but I have never been a very good earner. I have not succeeded in building up much savings. In about 60 days, I will likely receive a net $680,000 windfall, after taxes, from a land sale. This may be the only windfall I ever receive and I want to make sure I invest it with maximum effect and wisdom.

Would it be wise for me to use the $680,000 to purchase an annuity that would generate a guaranteed life-long income? Also, to diversify, would purchasing several small dollar annuities from different insurance companies be a wiser strategy than using the full amount to buy a single high-dollar one?

---J.B., by e-mail


A. Life annuities, where you exchange a sum of principal for the guarantee of an income for life no matter how long you live, are a great tool for older people who want to increase their cash flow, reduce their taxes, and avoid the hassle of worrying about investments. That's why you'll seem them mentioned frequently in this column, particularly for people 65 and older.

You, however, are still young. You may not feel that way, but you are. More important, the longer the life expectancy for your age group, the smaller the income benefit and tax benefit you can expect from buying a life annuity. Still more important, the real purchasing power of your annuity income will begin to decline the day you get your first monthly check.

If inflation averages 3 percent for the next 40 years--- when you will be 91--- the purchasing power of $1,000 of annuity income will have declined to only $307.   That's probably not the future you want.

So I suggest accepting the uncertainty of investment returns over the certainty of declining purchasing power. The simple and inexpensive, solution is to invest the money in a balanced mutual fund, remembering that few managed funds beat an index over the long term. That makes Vanguard Balanced Index a good one-stop shopping solution--- it has beaten 76 percent of all balanced funds over the last 10 years. Vanguard Balanced Index Admiral shares, which require a minimum purchase of $250,000, have a lower expense ratio--- 0.15 percent--- than the shares that require a minimum investment of only $3,000.

You might also invest some of the money in a handful of no-load, low cost managed balanced funds that have had superior performance for very long periods of time such as Dodge and Cox Balanced, Vanguard Wellington, and Fidelity Puritan.


Q. I had high hopes for ETFs (exchange traded funds) at first but have the following concerns:

1.  Hedge funds use them to short the indexes.

2.  Traders use them to arbitrage the announced index changes.

3.  Day traders use them, introducing more volatility.

This might be less of an issue over the long run, but it just seems that they aren't being used as intended. What do you say?

---J.S., Monticello, MN


A. The more ways they are used, the better. Every use increases their liquidity and the overall liquidity of the markets, which tends to decrease transaction costs. Meanwhile, they are the broadest challenge the overfed mutual fund industry has had in decades. You and I can now build broad, complex portfolios at low cost.