Q: Would you provide advice about investments, asset allocation, and diversity for us? We are 82 years old with adequate assets, but we're not well diversified. We have no debt, reside in a life care community, and are in fair health and mildly active.
C.B., Kennett Square, Pa.
A: Asset allocation is the concept of deciding how your money should be divided among broad investment classes, such as stocks, bonds, and cash equivalents. Rather than focusing on individual investments (such as which stock to buy), asset allocation approaches diversification from a more general viewpoint.
For many people in their 80s, a lower percentage allocation to stocks is usually recommended if you're relying on your assets for income, says Greg Fernandez, a certified financial planner in McLean, Va.
The underlying principle of diversification is that different classes of investments have shown different rates of return and levels of price volatility (risk) over time. Also, since different asset classes respond differently to the same news, your stocks may go down while your bonds go up, or vice versa. Diversifying your investments across different asset classes will help you minimize volatility while maximizing potential return.
So, how do you choose the mix that's right for you? There are countless resources to assist you, including interactive tools and sample allocation models. Most of these take a number of variables – some objective (your age, the financial resources available to you, your time frames), some subjective (your tolerance for risk, your outlook on the economy) – and suggest a possible allocation mix.
Tailoring this suggested allocation mix to your needs is up to you. You can do this on your own, or you can work with a financial adviser if you so choose. Either way, low cost mutual funds are a good place to start, Mr. Fernandez says.
Q: As my Series HH Savings Bonds will soon mature and quit paying interest, will the Treasury calculate taxes due based on current or constant dollars? I converted Series E bonds from the 1944-1946 period, with a face value of $60,000, but the value of the inflation-adjusted dollar averaged 10.7 percent over that period. The average adjusted value of the earlier dollar is $31.98, for a total of $1,918,554. No purchase records are available.
H.N., Annapolis, Md.
A: The Treasury calculates taxes in current dollars. Tom Adams, editor of www.savings-bond-advisor.com, says that when you converted your Series E Savings Bonds to Series HH Bonds, the Treasury allowed you to defer paying income taxes on the interest the E bonds had earned.
In a sense, instead of collecting the tax at that time, Mr. Adams says, the Treasury loaned you the money for 20 years and let you earn HH bond interest on it. The front of your HH bonds will have an entry for "deferred interest." After you cash them in, both you and the IRS will receive a 1099-INT tax form reporting that amount of interest as income. You'll owe taxes on that interest at today's tax rates and with today's less valuable dollar, even though you earned it many years ago.
While it's true that on an inflation-adjusted basis your E bond interest was worth more 20 years ago, Adams says that Uncle Sam won't charge you extra for that.