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Phil,

I think what you have done for your neighbor is great, she is lucky to have a friend like you. I also think you made the best decision by opening an account with Vanguard, they have the lowest cost mutual funds in the business built around index investing. Great company.
If your friend was ten years younger it would be of the utmost importance to grow her money as opposed to investing in bonds or bond funds. Even now, she could live for up to 15 more years, so growth is still important. Take a look at the book of funds Vanguard sends along with the new account package (or go to their website), there is a listing along with investment objectives and returns for each fund. Two no-brainers are the S&P 500 Index Fund and the Whole Market Index Fund, I would put my Grandmother's money in either of those with full confidence. Index funds are inherently tax friendly as there is little turnover in the fund's portfolio.
As far as the income side of the picture is concerned, check out some growth and income funds. These funds invest in stocks and fixed income securities and use creative ways to provide income at either a fixed rate or variable rate, depending on market fluctuations . With an account the size of your neighbor's, I'm sure a representative from Vanguard would be glad to discuss your options.

Good luck,
Ed
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