Q. I am 74 years of age, still working and contributing to a 401K.   I also receive a Social Security benefit of   $20,000 per year.   My wife receives a SS benefit of $8,000 per year and a small pension of $2,500 Per year.

I would like to retire at the end of this year and live off the additional income I could earn from a 401K with a value of $170,000 and two IRA's with a combined value of $210,000.   I estimate my annual expenses at retirement to be about $60,000 per year.

What mix of investments would you recommend for my IRA's and 401K when I retire?

---B.H., by e-mail from Houston, TX


A. Assuming I got the addition right, you're looking to withdraw nearly 8 percent a year (7.8 percent to be precise) from your $380,000 in tax deferred accounts. I get that by subtracting your combined Social Security and pension income of $30,500 from your estimated $60,000 in annual expenses. I also assume the $60,000 includes income taxes.

Even though you are 74 and have a shorter horizon than a 62 year old, a near 8 percent withdrawal rate is pretty dangerous. I suggest that you explore three ways to handle the problem.

One method is to cut your living expenses. A withdrawal rate of 6 percent would produce $6,700 less in taxable income. Your actual purchasing power reduction would be smaller because your income tax bill would be lower. While 6 percent is higher than the ideal withdrawal rate of about 4 percent, it's not entirely unreasonable and you're 74, not 62.

Another method is to buy a joint annuity with some of your investment money. This will increase your income at the expense of reducing your estate. A $100,000 joint life annuity, providing the same income until both you and you wife die, would provide $632 a month, a 7.58 percent cash flow. (You can check current quotes by visiting www.immediateannuity.com).

Unfortunately, the life annuity rate is about what you need to fulfill your spending plan which means you'd need to annuitize every dime to reach your income goal. Complete annuitization wouldn't be a good idea. It would leave you with no flexibility and would sentence you to declining purchasing power as inflation erodes the purchasing power of our income.

What to do? Use the annuity income as a stabilizer and withdraw from the remaining money at a 6 percent rate. That would give you about $7,600 from the annuity and $16,800 from your remaining investments, a total of $24,400. That's $5,100 short of your spending goal---less after taxes are considered.

The third way is to take a hard look at a major asset related expense, like your house. Even if you own it free and clear, the annual cost of living in your current home may be more than you need to pay. It is possible that you could reduce your expenses, liberate equity for investment, and add convenience to your retired life simply by "down-sizing" to a less expensive home with lower operating expenses.

Suppose, for instance, that you owned a $200,000 house free and clear and that it's annual expenses were about $12,000. If you moved to a $100,000 townhouse you'd have about $100,000 of new money to invest. Assuming a 6 percent withdrawal rate, you'd have $6,000 a year more in income. In addition, your shelter expenses would drop by about $6,000.

That's a total shift of $12,000 a year.

Here's still another way to look at the numbers. A downsizing that reduced your shelter expenses by $6,000 would reduce the amount of income you need from your nest egg to $23,500. That's 6.2 percent of your $380,000 nest egg. Note that we're not counting any cash liberated from the home sale.

How this works, of course, depends entirely on the value of your house and the alternatives available in your area.