Q. My wife and I are in our mid seventies and are allocating our assets between stocks and bonds. A few years ago we decided that by the time we were 80 we should have 80% bonds and 20% equities. This method would now require a substantial move from stocks to bonds, which we don't want to do.

In a column of yours, entitled "Heeding advice of an elder" (October 26, 2003) you interviewed Mr. John Bogle for whom I have a great deal of respect. He advised that Social Security and pensions should be considered in determining the allocation. In his example, he "capitalizes" the Social Security amount by multiplying it by 14 in order to arrive at an amount that should be allocated to a bond equivalent. Would you tell me how he arrived at the number 14 and whether it is age related?

--- H. W., by e-mail from Dallas


A. The usual rule of thumb for life annuities is 15 to 17 times the annual income stream. It would definitely be age-related but I believe Mr. Bogle was using a 'generic' example for someone in their mid-60's. In the case of Social Security some would argue that it should have a higher multiple because the income is indexed to inflation.

As a practical matter you'll never get real precision in this because there is no accepted methodology for calculating the value of life incomes as asset equivalents. So pick a number---I'd pick 15--- and do your calculations. Many people find that it makes a significant shift in their defacto asset allocation. The average couple, for instance, receives about $1500 a month from Social Security or $18,000 a year. At a multiple of 15 that's the equivalent of a $270,000 bond portfolio. That means you'd need to have $67,500 in equities to get to an 80/20 mix.


Q. Our country has terrible international balance of payment deficits and national budget deficits. I keep hearing them mentioned as if they are the same problem (and maybe they do both stem from the same maturity deficits of the populace). Which is the bigger problem as regards a possible continued marked drop in the dollar? What steps are available to Uncle Sam to stem our purchase of foreign goods? Thanks.

---S. H., by e-mail from Dallas


A. Both are major problems. They are also related in a perverse way. Our trade deficit means that we keep exporting large quantities of dollars in exchange for goods. As long as other nations have a use for those dollars--- to use as their reserve currencies, to use in financing expanding trade, to use as a substitute for a weak local currency---we can continue to spend beyond our means.

Our federal deficit also works to recycle some of those exported dollars when foreign governments and investors buy Treasury securities with their dollars.

As long as others continue to have a use for our currency (or our Treasury obligations) we can continue doing what we are doing--- consuming more than we produce at home, saving little, and supporting a major military effort overseas. If foreigners decide that they have too many dollars and would rather hold another currency, or gold, then the value of our currency will continue to sink. Interest rates will rise eventually as the Treasury is forced to pay enough interest to create and attract domestic savings.

The biggest single lever on our trade deficit is our consumption of imported oil. We are bleeding cash. The American automobile industry has consistently lobbied against any effort to increase gasoline mileage, which is a major step Congress could take to slow the purchase of foreign goods.

Will they do it? When we have a real crisis.