A low-risk fund and CDs may be the right mix for a risk-averse retiree. By Jeffrey R. Kosnett, Senior Editor September 4, 2008 OUR READER: WHO: Dennis Kotek, 64 WHAT: Retired from medical-device sales, now a part-time real estate agent WHERE: Surf City, N.C. SYMPTOM: Has a fortune in a money-market fund in his IRA but fears losing big to inflation.Dennis could fabricate a tall tale to explain his decision to pull $600,000 of IRA savings out of the stock market a year ago. But he's too honest to claim he foresaw a bear market. "Dumb luck," says Dennis, who moved from Chicago to North Carolina for work 18 years ago and retired with his wife, Janet, to the beach and golf course in 2004. Dennis accumulated his stake through company stock purchases and retirement plans. At first, he rolled the stash into Vanguard LifeStrategy Conservative Growth fund. In October 2007, he moved all of it to a Vanguard money-market fund. The fund yields a puny 2.2%, but the chance of it losing value is virtually zero. For now, Dennis can leave his IRA money alone. He has pension income, collects interest on certificates of deposit and earns commissions from selling property on the Carolina coast. But with sales of even oceanfront property in a rut, Dennis expects to tap the IRA before he's 70, the age at which you must begin making withdrawals. As he waits, he's no longer willing to accept a return that's well below the inflation rate. Advertisement Dennis has never made -- and doesn't want to make -- many decisions about his investments. His instinct is to be cautious and place no more than 40% in stocks, with the rest in bonds or cashlike investments. Financial pros laud Dennis for rethinking his allocation, but urge him to weigh carefully the risks and rewards. "The first decision is determining how much is to be exposed to risk at all," says Michael Kitces, of Pinnacle Advisory Group, in Columbia, Md. That means anything that can lose money, including bonds, bond funds and commodities, as well as stocks. Kitces says a retiree needs to put at least 30% to 40% of a portfolio in "risk assets" to stand a chance of earning a return that matches inflation. But he advises against placing more than 70% in such assets because the potential rewards aren't enough to offset the chance of painful losses. Dennis's next job is to decide how many investments to track. He's comfortable putting a large chunk of his money in one investment, so the challenge is to identify a well-diversified fund that holds down risk yet offers some growth potential. Advertisement An ideal choice, suitable for half of Dennis's assets, is Vanguard Wellesley Income fund. It is a well-diversified fund that typically holds one-third of its assets in stocks and two-thirds in bonds. Year-to-date to August 11, the fund lost 4%, but it hasn't lost more than 3% in any quarter since 2002. Over the past ten years, it gained an annualized 6%. Dennis can pair Wellesley Income with laddered CDs, which should yield more than a money fund does now. And when the Federal Reserve raises short-term interest rates to combat inflation, he can move cash into newly energized money-market funds.