Q. My wife is 58 1/2 years old and I am 59 1/2. We plan retiring in June 1999. My wife has a small pension plan with which she has a choice of a $24,000 lump sum or a $450 monthly annuity. Which should she take? I have a $525,000 retirement portfolio, consisting of $225,000 in money markets and CDs, almost $25,000 in common stocks, and the rest in income-oriented mutual funds. What changes should I make? I need to take out approximately $3,200 a month.

C.M., Beaumont, Texas

A. Your wife's pension options sound too good to be true. If the numbers are right, there's no question that the annuity is more attractive than the lump sum. If your wife were to take the cash and invest it so as to produce a $450 monthly income stream for 20 years, she would have to achieve a 24.78 percent average annual return. Either her employer is offering a very powerful incentive to take the annuity, or there's something wrong with the terms as you have stated them. Anyway, if you've got it right, take the annuity with a glad cry. But check.

As for your portfolio, I worked it out on a spreadsheet and estimated a portfolio average 6.26 percent yield; I say estimated because you provided yields for everything but your common stock, and I plugged a very conservative 1 percent in there. This brings you an annual income stream of $32,862, or $2,738 a month. If you can add your wife's annuity, it takes you within 12 bucks of the target $3,200. If you consider the annuity as separate money, you could simply stick with the portfolio as it is, counting on it to last about 30 years -- and probably a little more, because that calculation didn't account for growth within that small stock portfolio. But if we estimate 8 percent growth in the stock portfolio over those 30 years that segment of the portfolio would grow to about $251,000 -- enough to keep you going for another eight years or so.

That all works out tidily on paper, but not if you worry about inflation. The value of $3,200 a month is certain to be less in a decade or so than it is now. So what you need is something to deliver capital growth as well as income. I usually find myself advising people your age to cut back on stocks; in your case, it's the opposite. You hold less than 5 percent stocks, and I think at a minimum that figure should be doubled -- and given your relative youth, it should probably be tripled. You can do this in different ways.

One would be to try to trim your budget by $200 to $300 a month, transferring funds (slowly) from your lowest-yielding investment (the money market) to a middle-of-the-road stock fund, such as one tracking the S&P 500.

Another option, provided you and your wife will be eligible for Social Security checks in a few years, is to proceed with the current portfolio until those checks kick in; once that happens, keep your income stream as it is and use the Social Security checks to build up the stock position.

Remember, once Social Security does kick in, it will represent the last substantial ``raise'' you're likely to see in retirement, so you'll want to use as much of it as you can to protect yourself against future inflation.