Q. I will be 62 next month and will begin drawing Social Security of $1,112 a month. I retired last year, and the Social Security will combine with a pension of $1,500 a month and my wife's pension and Social Security. We own our home. We are not desperate for more income, but it would be convenient. I enclose a copy of the statement on my 401(k), which remains with my former employer. I would like to move it and then draw some income without loss of principal. The 401(k) is invested through Vanguard, and I would like to stay with them, although it could be moved elsewhere. How should I handle these funds to get the maximum gains with the least loss?

W.M., Warren, Texas

A. The statement shows that 97 percent of the 401(k) is in a Vanguard money market fund, with the other 3 percent in a common stock, presumably that of your former employer.

I often hesitate to suggest much of a change when a person has a portfolio that's this conservative, reasoning that if one holds a huge percentage of his savings in a money market fund, it's because he is very, very conservative.

On the other hand, some people hold money market investments simply because they didn't understand the confusing array of offerings when they set up their account, and accordingly chose what seemed simplest and safest.

Obviously you could roll the account into a Vanguard IRA with similar investments and obtain your goal of an income stream without loss of principal by simply withdrawing the actual dividends from the money market shares. You could even sell the common stock and put that money into the same fund.

But if you want to be a bit more aggressive, I make this suggestion. Instead of the money market fund, roll the account into shares of Vanguard's GNMA fund -- an above-average performer within its category, and a fund that you can expect, over the long run, to yield about 1.5 percentage points more than the money markets.

The key words are ``over the long run,'' because there's no escaping the fact that Ginnie Mae funds can be quite volatile in the short term.

These funds own government-guaranteed mortgage securities, and while Uncle Sam stands behind both interest and principal payments, the value of these holdings -- like any fixed-income investment -- fluctuates inversely to interest rates. That's to say, when interest rates rise, the value of these securities fall; when interest rates fall, fixed-income securities rise in value.

Worse, the value of such funds also rises or falls when the markets only speculate that interest rates will change. The long-term record shows that these funds do poorly in about two of every 10 years, but that they also tend to make back the lost ground fairly quickly.

Here's a conservative strategy for a GNMA position for one who is concerned about preserving capital. Move the funds to the GNMA, but direct that Vanguard send you monthly checks representing only 5 percent of the value of your initial investment. Since the GNMA fund is currently producing a yield of 6.5 percent, that means you would be reinvesting about 23 percent of your yield.

Over time those reinvestments should build up a buffer sufficient to keep the principal value at a higher level than your initial investment, even when those inevitable bad years come.

Finally, once that buffer has made the account 10 to 15 percent larger than your initial investment, you could direct that the entire yield from your position be sent to you monthly.

At least on paper, if a fund yields 6.5 percent and you withdraw only 5 percent, the principal should grow by 10 percent in a matter of six years and one month; to achieve 15 percent principal growth would require a little less than 8 1/2 years.

Either way, once you get to the target, you could then give yourself a ``raise,'' increasing your withdrawals by 43 percent if you set the target for the buffer at 10 percent, and by nearly 50 percent if you set the buffer at 15 percent. Either way, it's an attractive way to build a little protection against inflation.