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Q: I am 71 years old with no debts. Basically, I have only my monthly living expenses, and those, by and large, are covered by Social Security. Where can I invest $100,000 to produce a very modest, low-risk return?

A: At last! A reader seeking a “very modest” return! If that is what you seek, the world is your oyster. Today, modest, even extremely modest, returns are available in abundance. (Sorry, I couldn’t resist.)

One of the best low-risk/low-reward deals available in the current market is investing in relatively short-term Treasury Inflation-Protected Securities (TIPS). An index fund of these securities can be purchased as an exchange-traded fund (ETF) on any discount brokerage platform.

The benefit of these securities is that you get the guarantee of adjustment for inflation and the upside that it provides if inflation comes back.

Basically, these funds are a good “parking place” for modest risk with a return that is likely to be greater than cash and somewhat less than the rate of inflation.

There are now three exchange-traded funds indexed to zero-to five-year Treasury Inflation-Protected Securities. They are:

• iShares 0-5 Year TIPS Bond Fund (ticker: STIP; expense ratio 0.20 percent);

• PIMCO 1-5 Year U.S. TIPS Index Fund (ticker: STPZ; expense ratio 0.20 percent);

• Vanguard Short-Term Inflation-Protected Securities Index Fund (ticker: VTIP; expense ratio 0.10 percent).

Q: Perhaps this has been addressed by the financial community in the past, but I do not recall seeing it if it was. The question: How do you factor in the impact of a pension or life annuity on your philosophy of asset allocation for retirement?

A: It would be nice if this question had a nicely calculated and universally accepted answer, but it does not.

Academic researchers such as Laurence Kotlikoff at Boston University and Wade Pfau at the American College of Financial Services, however, both conclude that the higher your guaranteed income from Social Security, pensions or life annuities relative to your basic living expenses, the more risk you can afford with your savings.

The reason for this is simple: If your investments are providing only 10 percent of the income you need to pay your bills, a major investment loss will be a much smaller problem than if they are providing 90 percent of your income.

These questions are now moving out of academic research into retirement planning in the field.

Firms are developing broad household balance-sheet analysis tools for financial planners specializing in retirement income planning.

While only a handful of planners (about 100) have earned the designation to date, this thinking is at the core of the RMA (Retirement Management Analyst) certification.


Copyright 2013, Universal Press Syndicate