(MONEY Magazine) – During 35 years of marriage, Ellen Tyack ran the business of the household. Spontaneity and adventure were the realm of her husband Jim--a poet, an artist, a professor and, once upon a time in San Francisco, a pal of their upstairs neighbor Janis Joplin.

But life changed for Ellen after Jim died in 2003. Always the responsible one--she was even paying bills from her hospital bed soon after the couple's son Max was born--Ellen, 59, began to shed obligations and dream about ways to indulge her own free spirit. She paid off the mortgage on their $350,000 home in New York's Hudson Valley. Early last year, she retired from her job as a social work supervisor and started drawing her pension.

Now, Ellen is bursting with ambitions: to visit friends from California to Greece, for starters, and to build homes with Habitat for Humanity. But she's also worried that inflation will eat away at her finances, threatening the viability of her ever-shifting plans. "Things might change for me--I might move, I might meet someone," says Tyack. "And I'm fine now. But what happens in 10 or 15 years?"

Where She Is Now

Tyack is far from extravagant. She drives a 1995 Toyota Corolla and buys furniture on sale. Debt-free, she saves at least $500 a month from her $50,000-a-year pension. She'll start collecting an annual widow's benefit of $10,800 from Social Security next month.

But she's right to worry about inflation. In 15 years, she will likely have to spend $56,000 annually to maintain the standard of living that now costs her about $36,000. Her pension, though, won't keep pace. She has $145,000 in retirement accounts, but she doesn't know whether that's enough to neutralize inflation, even if she continues to save.

She faces other risks: Most of her money's tied up in retirement accounts; the $2,900 in her bank account isn't enough for emergencies. And Tyack has life insurance, which she might not need, but no long-term-care coverage, which she might.

What She Should Do

Tyack can secure her financial future, says Chip Simon, a certified financial planner in Fishkill, N.Y. She should start, he says, by putting her monthly savings into her emergency fund until it reaches at least $10,000. And he has other ideas about how she should reallocate her assets.

• GET A DEBT Now that the house is paid off, Tyack should take out a new 30-year fixed-rate mortgage for $100,000, says Simon. Granted, Tyack was glad to be rid of the payments. But her house amounts to 70% of her net worth, and Simon thinks more of that should be invested in securities.

A 6.5% loan will actually cost Tyack 4.875% thanks to the mortgage interest tax deduction. "She can make more money out in the market than it costs her to borrow it," says Simon. While Simon wouldn't suggest this strategy for most retirees, he says Tyack can do it because she has guaranteed income that would exceed her living expenses and mortgage payment.

• PUT IT TO WORK Tyack should put that $100,000 in stocks, says Simon, mostly via Vanguard index funds: $56,000 split between 500 (VFINX) and Value (VIVAX), and smaller amounts in Mid-Cap (VIMSX) and Small-Cap (NAESX) and Dodge & Cox International (DODFX). If her portfolio averages a 7% return over 10 years, the new money, plus monthly deposits, will boost her kitty to $545,000--some $200,000 more than she'd have otherwise. When she has to start pulling money from her retirement accounts (soon after age 70½), Tyack ought to be able to withdraw up to 4.5% of her savings, or $24,500, the first year, raising that figure annually to stay even with inflation.

• STAY CONSERVATIVE Simon wants Tyack to maintain her current allocation of about 50% stocks and 50% bonds. He suggests dividing the $124,000 in Tyack's 457--the civil servant's equivalent of a 401(k) plan--between two types of bond funds: an intermediate bond fund, which has potentially high yields, and a stable-value fund, which is not subject to price fluctuations.

• THINK AHEAD Costly long-term care could sabotage Tyack's budget. But, says Simon, Tyack's uncertain plans make it hard to know whether long-term-care insurance is her best option. He thinks that Ellen and Max (now 29 and living nearby) should attend a local college's seminar on long-term care to get started on a solution. Simon advises Ellen to keep her life insurance if she takes out the mortgage, so Max could pay it off upon her death.

Ellen, seeking freedom, initially rejected taking on debt in retirement. But she's starting to like Simon's idea. "It doesn't sound as scary or crazy as it did at first," she says.

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Ellen Tyack

ORANGE COUNTY, N.Y.

Retired social worker, 59

GOALS

• To enjoy a fun and flexible retirement

• To protect her savings and pension from inflation

ASSETS

$145,000 in retirement accounts

$2,900 in a savings account

$350,000 home

The Portfolio

A fifty-fifty mix of stocks and bonds will guard against inflation.

25% STABLE-VALUE FUND

25% INTERMEDIATE BONDS

25% LARGE-CAP STOCKS

8% MIDCAP STOCKS

5% SMALL-CAP STOCKS

12% INTL. STOCKS