Scott Burns: Retirement planning as easy as 1-2-3

Q: My husband and I are getting ready to retire next year. We have decided to use the bucket method for funding part of our retirement. The first bucket is for immediate spending during the first five years (this bucket must be safe). The second bucket is for years six to 10 (this bucket must be able to grow, have low risk), and the third bucket is for growth (this bucket would not be tapped for at least 10 years).

What type of investments would you suggest for each bucket?

A: Bucket 1: A ladder of CDs or other secure interest-rate investment, with the money you need in each year maturing on schedule. You could also explore CD-like annuities, which often yield a bit more, and yields on deposits at credit unions.

Bucket 2: A low-cost balanced fund such as Vanguard Wellington, current yield 3.1 percent according to Morningstar, or a 50/50 combination of Vanguard GNMA and Vanguard Windsor.

Bucket 3: A low-cost global equity fund, such as the Vanguard Total World Stock Index. An alternative with a higher commitment to the U.S. and a small (15 percent) commitment to fixed income would be Fidelity Four-in-One Index fund.

The buckets, evenly divided, would result in a portfolio that was slightly more than 50 percent equities. It would have a highly liquid front end for meeting current and emergency expenses. It would also be very inexpensive to manage.

Q: My wife and I are 66. I have a $56,000 IRA. She has a $37,000 IRA (total $93,000). Both IRAs are in CDs at 2.5 percent. In four years we must start mandatory withdrawals.

We now get $70,000 a year from Social Security, her pension, and interest on $700,000 in CDs. We also have a house in Mexico and one in Tucson, Ariz., no mortgages.

Part of our Social Security is already taxable ($13,000 of $25,000) and any annuity payments would be taxable. A recent Wall Street Journal article suggests using life annuities — but doesn't say whether or not it makes sense. It seems the best bet would be to wait until we're 70 and then convert the IRAs to guaranteed 10-year annuities. The imputed rate in an annuity seems to be always higher than a CD. What do you think?

A: Converting your $93,000 in IRAs to 10-year guaranteed joint life annuities will increase your income and taxes more than simply taking required minimum distributions.

But it will also eliminate the hassle of managing the IRAs, which are a small portion of your retirement assets. Basically, you'll be "front-loading" your consumption from the IRAs since you'll have more purchasing power now and less later as inflation erodes the purchasing power of the fixed income.

While you may have some concern about the taxes you are paying on your Social Security benefits, the good news is that this is a tax that has a limit, and you're close to it — you'll never pay taxes on more than 85 percent of your benefits.

Questions: scott@scottburns.com