By Scott Burns

Q. My wife and I are very young sixties. I semi-retired this year and am working only three days a week. I gross $42,000. My wife is still working full time. She makes about $82,000. This year we took out a loan to remodel our kitchen. We didn't have a mortgage before the remodeling, but now we do— a 4.5 percent loan for $75,000.  We have no credit card debt.

I recently sold a stock that I made about $30,000 profit on. The proceeds are currently sitting in a traditional IRA with an Internet stock-trading company. I would like to buy a motorcycle. I would use about $10,000 of the stock sale money in the IRA since it seems like free money. On the other hand, maybe I should go with my gut. It tells me to pay down our mortgage loan using the entire $30,000.  We have about $350,000 in retirement savings.  Each of us will eventually have a small pension.  It comes down whether the IRA is "free" money to be used for buying wanted items or should it be used for paying off debt? Your thoughts? —B.V., Seattle, WA

A. You don't have any “free” money. What you have is savings that you hope will last for the rest of your life. One of you is likely to live at least 25 years. The issue here isn't a kitchen remodel or a motorcycle, it is how do your current retirement income sources compare to your current spending? My bet: Not well.

Right now you and your wife have total earned income of $124,000 a year. When you retire you will each have Social Security benefits. You can get an estimate of the amount from the annual statements sent to you by Social Security. You will also have whatever you can safely withdraw from your retirement accounts. Since those now have $350,000 you might expect to withdraw about $14,000 a year. Then add the pensions you mentioned.

Now compare that total income to your current total expenses— house operating expenses, home loan payments, auto operating costs, monthly credit card bill, and whatever else you have. Unless the expected future income is a lot larger than your expected future expenses, your best step would be to pay off the kitchen remodel loan ASAP from your current earned income and let the IRA continue to grow.

Q. I have heard financial advisers recommend individual bonds rather than bond mutual funds for a retirement portfolio. I understand the advantage of holding individual bonds to maturity so as to not worry about principal loss or fluctuation in dividends. I also understand that bonds can be built into a ladder of different maturities.

But to maintain safety I would have to buy low risk, low yield bonds whereas with bond funds I could get exposure to some higher yield bonds without too much risk and the bond funds should be more liquid. The nasty thing about bond mutual funds is that your principal is always fluctuating and you never reach the safety of a maturity date. In this respect bond funds seem riskier. Which works better for a retirement portfolio? —C. W., Plano, TX.

A. The trouble with individual bonds is that unless you are a very large investor you will get skinned on the bid/ask spread when you buy or sell the bonds. Hold to maturity and you will only have one transaction in which you get skinned, but you can't be sure that you'll be able to hold to maturity.

If you are building a ladder you can get the best of both worlds by using exchange traded funds that own U.S. Treasury obligations in a specific maturity range. You won't get to hold to maturity (although the fund probably will) but you'll have a pretty good idea of your risk and your money will be divided into different baskets that you can sell as needed. The iShares Treasury ETFs, for instance, are available in these maturity ranges: 1 to 3 years, 3 to 7 years, 7 to 10 years, 10 to 20 years, and over 20 years.

Investments in less liquid issues than U.S. Treasury obligations are best done through mutual funds or ETFs. Your investment, regardless of size, will enjoy the bid/ask benefits of a large investor and you will have instant broad diversification. Do that with a low-cost fund and you'll have the most efficient way to hold an asset class.