Q. How do you breathe your last breath and spend your last dollar? I'm 62 with enough to last (I hope). I have no need to leave an estate. I don't want to run out, and shrouds have no pockets.

---B.P., by e-mail


A. The easy way would be to find out your date of death, put all your money in iSavings Bonds, and redeem the bonds evenly through the remainder of your life. But neither life nor death is that easy because our date of death is an elusive piece of information.

So we have to punt.

One option is to replace your financial assets with life annuities, as you get older. This will increase your annual income and eliminate the assets from your estate. You can buy a life annuity from an insurance company. You can also buy a life annuity from many of the major charities. A charitable life annuity will give you a tax deduction today, while you are alive, and assure you that any money left at your death will go to your chosen charity.

My personal view: leaving money behind isn't like leaving an old shoe collection. It isn't messy. Most people like it. Few will object if we leave some cash behind.

If you are doing what you want to do and enjoy your life, this issue doesn't deserve much of your time or attention.


Q. My wife and I recently inherited $75,000. We are in our mid seventies. We are considering mutual funds for additional monthly income. We would like your advice on investing in tax-free municipal bond funds. We are in the 15 percent tax bracket, so the tax break would not be all that great. Please list the pros and cons for these type funds. I have seen some that have 4 and 5 star ratings from Morningstar. I have also heard that some of these tax-free municipal funds must be reported to the IRS, using the Alternative Minimum Tax form.

---J.R., by e-mail


A. If you are in the 15 percent tax bracket without anything unusual on your tax return it's highly unlikely that you need to be concerned about the Alternative Minimum Tax. But that's a sideshow. The real issue for you is whether it is worth your while to invest in tax-free bonds at all.

  I don't think they make sense for you--- or for most investors. Let me explain why.

The important thing about income investing is the amount of income you have to spend. Recently, the yield on high quality 2-year tax-free obligations was 1.33 percent. The yield on 2-year Treasury obligations was 1.56 percent. (You can find this information on www.bloomberg.com.)  Divide the tax-free yield by the taxable yield and you get 0.85.

In other words, you get 15 percent less income from the tax-free obligation than from the taxable obligation. As a consequence, your federal income tax bill will be lower--- but you won't have an extra dime to spend.

It's pretty much the same if you compare 5-year obligations. Tax frees yield 2.34 percent and Treasuries yield 2.79 percent. So the tax-free yield is 84 percent of the yield on taxables. Invest $100,000 and your spendable income will increase by a stunning $31 a year. Invest $10,000 and your spendable income will increase by $3.10.

The only way to get a material benefit is to invest in very long-term bonds. Thirty-year tax-free bonds, for instance, were recently yielding 4.71 percent, only slightly less than the 4.77 percent yield on Treasury obligations. Unfortunately, the longer the maturity, the greater the risk of loss if interest rates rise.

My advice: sit tight. Put your money in iSavings Bonds to get some protection from inflation and defer any taxes on your return until the bonds are redeemed.