January 19, 1998

Q. I am 62 and expect to retire from my government job in April at age 62. I have $150,000 in the Thrift Savings Plan, $28,000 in US Savings Bonds, $10,000 in miscellaneous IRAs, and expect a pension of $2,300 a month plus $685 monthly from Social Security. My main concern is how to invest the Thrift Savings money in an IRA. I want to draw out $300 to $500 monthly and also see a modest gain in the principal.

J.T., San Diego

A. I suggest you divide the new IRA into two basic segments.

First, you want an income-oriented side, which will probably represent the largest portion. Before you do this, though, decide what the income requirements will be -- there's a big difference between $300 a month and $500 a month.

If you want yield and are willing to ride out the market bumps in principal value, I would invest in a Ginnie Mae fund, which invest in government-guaranteed mortgages.

The better GNMA funds currently yield about 6.5 percent. If you'll likely withdraw $500 a month, you'll want to move $93,000 of the Thrift Savings Plan money there. If you can get by with $300 a month, you'll need about $56,000 in such a fund. A middle course of $400 monthly withdrawals would require $74,000. I suggest a conservative strategy.

Suppose you decide you can get by on $400 a month. Why not, then, build in a little sponge? If you put $80,000 in the GNMA fund, at current rates, this would produce $5,200 annual income -- thus enabling you to withdraw about $100 extra each quarter if emergencies or whims thus dictate.

There are many solid GNMA funds. The one I use is Vanguard GNMA. Another excellent fund is Fidelity Spartan GNMA, again (for the record) a fund used by a family member. Both are no-load funds, and both apply a straightforward plain-vanilla approach to managing their portfolios.

Second, you'll want the balance of your money as your growth pool to protect against the ravages of inflation or to provide for emergencies.

Since this segment becomes long-term money you should invest it fairly conservatively, putting half in a good balanced fund and half in a conservative stock fund. I suggest Vanguard Balanced Index in the first category (although there are many excellent balanced funds, including Dodge and Cox Balanced, Fidelity Puritan, and Janus Balanced) and Vanguard Index Value for the second (alternatives are Fidelity Growth and Income and AARP Growth and Income).

Whatever funds you select for the growth end of the portfolio, I suggest you use dollar-cost averaging -- investing in increments over 36 months -- to move into the market.