Seniors - asset rich and cash poor

NEW YORK (Money) -- Question: What advice can you give to two senior citizens, ages 72 and 76, who are asset rich but cash poor and are concerned about running out of money? We sell appreciated rental properties to make ends meet and allow us to do some traveling and enjoy the little luxuries of life. Is it too late for us to invest in stocks and bonds? We also have zero risk tolerance now that we're on in years. - Felix, Orange Park, Fla.

Answer: Too late to invest in stocks? Hardly. Even though you're both in your 70s, you've still likely got plenty of years ahead of you. A 72-year-old woman, for example, can expect to live well into her 80s. (To get a sense of your life expectancy and how it changes depending on factors like weight, blood pressure and family history, click here).

Unless you've got some medical problem or family history you think will seriously shorten your life spans, to be on the safe side you should probably plan as if either or both of you will live into your early or mid-90s.

That means you still need a bit of growth in your portfolio to maintain your purchasing power in those later years. Stocks can provide that long-term protection from rising prices and increase the odds you'll be able to fund those luxuries you talked about - or have money to pay for necessities like health-care costs, if necessary.

At the same time, however, you can't load up on equities the same as a person still accumulating a retirement nest egg. Even though stocks have historically generated lofty returns over the long run, they can take serious hits in the short-term. A market downturn combined with withdrawals from your portfolio could put a big dent in your portfolio's value, making it difficult for your savings to recover sufficiently during your lifetime. So you're right to be wary about going too heavily into stocks.

But there are ways to get the benefits of stocks' long-term growth potential without taking undue risks. One is to take the proceeds from your real estate sales and set aside a small dollop in stocks, while keeping the rest in short-term bonds and cash accounts like money-market funds and CDs. This way you'll have some potential for long-term growth, but decent protection from market setbacks.

How much should go into stocks? Well, we're probably talking somewhere in the neighborhood of 20% to 40%. But the figure that makes sense for you depends on several factors: how much money you have coming in from other sources such as Social Security, pensions and, in your case, possible rents from other properties; you also need to figure out how much you can afford to cut back on withdrawals from your portfolio in years with poor returns and whether you might need a cushion later in retirement for health care costs.

You've also got to factor in your tolerance for risk. You say that's zero. I take to mean that you're wary of subjecting your portfolio to the ups and downs of the market. Fine. But if you invest too conservatively you run the risk that your purchasing power might decline or that you could even run out of money. What you're really looking for is a good balance between modest growth potential and stability. Generally, the more anxious you are about owning stocks, the more you'll want to lean toward the low end of the 20%-to-40% range I mentioned above.

If you'd like to see the annual income potential different mixes of stocks and bonds offer over various periods of years as well as the possible short-term loss you might face with each mix check out Asset Allocator tool in the Investment Tools section of T. Rowe Price's web site. (You'll have to register to use the tool, but there's no charge.)

While you're there, you may want to take a look at T. Rowe's Retirement Income Calculator, which tells you how long a portfolio is likely to last given the amount you're withdrawing each month and the way you have the assets invested. (You don't even have to register to use this one.)

Another strategy you can consider is to take a portion of the proceeds from your real estate sale (maybe 25% or so) and use that money to buy an immediate annuity (aka an income annuity), which is a vehicle that gives you a guaranteed income stream. By taking what is known as the "joint and survivor" option, you can be assured of getting a monthly check as long as you or your spouse is alive. The immediate annuity income, plus what you get from Social Security, would assure that you don't run out of money. (For a sense of how much income you can get by investing in an immediate annuity, click here).

The rest of the money from the real estate proceeds would then go into a diversified portfolio, some portion of which would be invested in stocks. Since you have guaranteed income flowing in from the annuity and Social Security, you don't have to worry as much that a stock-market setback will jeopardize your retirement security. Theoretically at least, you can then afford to be more aggressive about investing in stocks. But you'll have to go with your instincts on this. You and your wife have a better sense than anyone else about just how much risk you feel comfortable taking.

If you do decide to put some money into stocks, I recommend you do it slowly. You're clearly concerned about risk, so tiptoeing in a little at a time may make you feel less anxious and give you a chance to get used to this new world of equities.

Likewise, if you decide you'd like to get guaranteed income from an annuity, you don't have to do it all at once. If you figured it would make sense to invest, say, $100,000, you could buy three different annuities over a period of several years. Since the income you get can vary significantly depending on interest rates, staggering your purchases would insure that you don't invest all your cash when rates are very low. You would, in effect, be diversifying your interest rate exposure.

With an annuity you're also counting on the insurer's financial ability to make those annuity payments the rest of your life. Sticking to insurers with top financial strength ratings from ratings firms is one way to help assure that you'll get those monthly checks as long as you live. You can hedge even more by buying annuities from different insurers. This way, even in the unlikely event that something happens to one of the highly ranked insurers, you'll continue to collect payments from the other two.

So by all means consider putting some of your money in stocks. But start small and take your time. If you decide you like the rewards of being in equities and are okay with the risks, you can always increase your stock holdings later on.