Q. I've had the "Couch Potato" portfolio for my 403b account for close to five years with 60% Vanguard Total stock market Index fund and 40% Total Bond Market Index.   I didn't know until recently that you now suggest Inflation Protected Securities in place of the Total Bond index.   Can you tell me why the change and would it be wise for me to swap out (having accumulated quite a bit of shares in the Total Bond) or is this what you recommend for those starting a new portfolio?

---M.F., by e-mail, Jacksonville, Florida


A. Choosing between Vanguard Total Bond Index fund (or its clones from other fund companies) and an Inflation Protected Securities Fund is a pretty close call--- but let me tell you why I think TIPS are likely to be the superior investment.

The Vanguard Total Bond Index fund is classified as an "intermediate" term government fund. If it follows the history of intermediate government securities, as tracked by Ibbotson Associates in Chicago, it will provide about a 3 percentage point premium to inflation, less its expenses of no more than 0.20 percent.

Unfortunately, it won't be a steady 3 percentage point premium. With conventional bonds, interest rates tend to rise with inflation. Rising interest rates cause bond prices to decline. In 1994, for instance, interest rates rose dramatically. As a consequence, Vanguard Total Bond Index had an interest return of 6.37 percent--- but lost 9.03 percent in market value of the bonds. Result: a net loss of 2.66 percent for the year.

Rising interest rates would have a similar effect on inflation protected securities--- UNLESS rising inflation was the cause of rising interest rates. If inflation was rising, the yield on inflation protected bonds would rise. This would offset some of the damage of rising interest rates.

TIPS could be even better investments if we have another period of roaring inflation like the 70s. Then, investors would be likely to sell conventional bonds and buy TIPS simply for inflation protection. As a result, the price of TIPS might actually rise.

Basically, the inflation-adjustment element of TIPS makes them likely to do better than conventional bonds in a rising interest rate environment. TIPS work to take a bit of uncertainty out of your portfolio.

While American Century, Fidelity, PIMCO, and Vanguard all have managed funds that invest in real return securities, it is also possible to buy an exchange traded fund (ETF) based on the Lehman Brothers U.S. TIPS index. It's the I Shares Lehman TIPS (ticker: TIP) and it has an expense ratio of 0.20 percent.


Q. I have never seen an answer to this question:   When a retiree reaches 70  ½ years of age he must begin Required Minimum Distributions from his IRAs.   Everything I read says that a retirees' total annual withdraw from his retirement assets should be no greater than 4 percent.   Is the annual RMD considered a part of that 4 percent?   In other words if I have $750,000 of retirement assets and my (second) RMD is $15,000, should my total withdrawal be $45,000 or $30,000?

Thanks very much,

---M.J., by e-mail from Arlington Heights, IL


A. Required Minimum Distributions and safe withdrawal rates are unrelated. RMDs are a matter of government regulations. Safe withdrawal rates are a matter of investment returns and price volatility.

Fortunately, required minimum distributions are a pretty good measure of a safe withdrawal rate. Why? Because the dictated rate is based on a distribution period that is longer than your life expectancy. Since 2002 most distributions (for couples) have been based on a simplified "Uniform Lifetime Table."   Singles have a higher RMD rate.

At age 70, for instance, the table indicates a distribution period of 27.4 years for an IRA. That translates into a minimum withdrawal rate of 3.65 percent (divide 100 by 27.4). The RMD doesn't exceed 4 percent until age 72 or 5 percent until age 78. Even at age 85 the RMD rate is based on a 15.5 year distribution period or 6.45 percent.

Since each distribution is based on the amount in your account in that year, few are likely to go broke taking required minimum distributions.

Finally, those who must take relatively high distributions can take them, pay taxes on them, and reinvest some of the money rather than spend it.   You can pay taxes and reinvest as much of the amount remaining as you please.

More information than most people can stand (100 pages) is available in IRS Publication number 590. It can be downloaded from the IRS website, www.irs.gov.