Q. My mother-in-law lost her husband last February 2001. She received an insurance settlement of $50,000 which has been in a money market fund until she can decide what else to invest it in. She has $60,000 in the American Funds Investment Company of America fund, $50,000 in a variable annuity, which is inside an IRA, and about $20,000 in savings accounts at banks. In addition, she is receiving Social Security and her husbands' pension. She can live on the income from those two sources.

She is not in immediate need of income, though she should have this money safe and easily accessible in case of some catastrophic need. A broker suggested that she deposit $25,000 in a Bank of America callable note that pays 6.5 percent and the other $25,000 in a Wisconsin Health and Education muni bond. I believe both will pay her income that she does not currently need and will be taxed on any proceeds. I have suggested a GNMA bond fund and laddered Treasuries. I don't understand why a broker made recommendations that no one can understand, especially my 76-year-old mother in law.

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


A. Neither your solution nor the brokers' solution will avoid taxes on the income. Yours, however, is more appropriate because it puts the un-invested money in a diversified mutual fund and in Treasury obligations, the most liquid securities in the world. The broker's recommendation would put $50,000 of her $180,000 in financial assets into two individual securities, increasing the individual security risk of her portfolio. One possible reason for the brokers' recommendation is that these may be new issues and his firm is being paid to distribute them to the public. If the securities have already been issued, his firm may have a position in them and may be offering bonus commissions to brokers for distributing them to the public. Whatever the reason, your idea is more suitable.

Another alternative would be to add to her investment in the Investment Company of America. This load fund has a long history of good performance, is value oriented, and has produced a higher return than the S&P 500 Index for longer than your mother-in-law can remember. According to Morningstar it has done better than the index over the last year, 3 years, 5 years, 10 years, and 15 years. It did better than 86 percent of its competitive peers over the last 15 years. Not many funds can say that. The tax efficiency of the fund runs around 98 percent--- so she will have some taxes to pay but not nearly as much as she might fear. With luck, she'll be able to buy the new shares from the same broker that recommended the original shares--- then and now he will be well compensated by a commission on the sale.

But what about risk?

What about it? Your mother in law can look for a conservative investment in her $50,000 IRA (from which she already must take annual distributions) and she already has $20,000 in insured savings accounts.

That's nearly 40 percent of her financial assets.


Q. How do you implement a 4 percent withdrawal strategy with a combination of IRA and non-IRA assets? My wife and I are in our mid-30's and live modestly. We have been fortunate with our investments. Our total assets, excluding our fully paid home, are about $1.5 million. About 60 percent is in a taxable account. The 40 percent in a tax-deferred account is split 80/20 between equities and CD's.

If we want to generate $70,000 of pre-tax income, do we need to begin taking substantially equal periodic payments from our IRAs?

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


A. You may need to live more modestly than you are proposing. Taking $70,000 a year, with a presumed adjustment for inflation, from a $1.5 million nest egg means a 4.7 percent starting withdrawal rate. While this is reasonable, with some risk, for an elderly couple, you could be looking at 55 years--- about 30 to normal retirement age and another 25 in normal retirement. The longer the withdrawal period, the lower the survival rate for any given portfolio.

You can get some measure of the problem by visiting the RetireEarlyHome page, http://www.retireearlyhomepage.com/ , where you will find an on-line tool for measuring different portfolio structures and withdrawal rates against survival rates. When I did the exercise for a 75/25-equity/fixed-income portfolio, for instance, I found that a 4.7 percent withdrawal rate had a 90.8 percent chance of surviving 30 years but only a 76.9 percent chance for 50 years.