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Mrs Madoff is sure aching

How tough is it living off $2.5 million? Ruth Madoff is about to find out.

Bernie Madoff's wife has been left with a lump sum in that amount from her settlement with the Justice Department.

The first thing to note is that the cash doesn't come completely free and clear. She may still face claims from the Securities & Exchange Commission, the Securities Investor Protection Corporation, and the trustees liquidating her husband's business and estate. It is also unclear how much Social Security she will have to live on as well.

When you cast aside the sort of smoke and mirrors used by her husband, a conservative investment portfolio may only earn about 3% a year over inflation. At that rate, and if Mrs. Madoff wants to make sure she doesn't outlive her money, her $2.5 million settlement should give her an annual income of maybe $125,000 a year. That would make the money last all the way to age 100.

That's a pretty good income. It's a lot more than many of her husband's ruined victims will have. But it will hardly support her past lifestyle. Mr. and Mrs. Madoff, according to court papers, owned homes in Manhattan, Montauk, N.Y., and Palm Beach, Fla., along with millions of dollars in furniture, art, furs, and the like.

Sounds like she's going to have to do, on a bigger scale, what a lot of Americans are doing right now: Downsize.

If Ruth Madoff spends a third of her $125,000 a year on accommodation, that will come to about $3,500 a month -- enough perhaps for a (modest) two bedroom in Manhattan, but nothing glamorous. It will rent more in Florida. Especially if she moves inland from Palm Beach -- to somewhere like Sunrise.

The good news? There's an Ikea nearby. And lots of factory outlets. And in Florida she will be able to survive without her $36,000 Russian sable coat.

As for cars: Mrs Madoff has to give up her Mercedes-Benz E class and CLK. But a brand new Mercedes SmartCar only costs about $14,000.

As for investments: Mrs Madoff is 68. She will need income to live on for maybe 30 years or more. She's going to have to generate income to live on, and enough growth to keep up with inflation. That's going to mean a conservative mix of stocks and bonds.

Among bonds, Treasurys look expensive. Even inflation protected Treasurys, so-called TIPS, are starting to look fully priced. And Mrs. Madoff would do well to avoid very long-term bonds. They are at risk from inflation.

There are better opportunities in corporate debt, from investment grade to high yield. She might also look at tax-exempt municipals -- she can earn at least 3.5% tax-free without taking on too much inflation risk. She might even consider emerging market government bonds.

If she wants stocks paying good income as well, Mrs. Madoff should be able to earn yields of about 4.5% a year right now without taking too much risk. Closed-end funds -- special mutual funds that trade like regular shares -- can be a great way to get equity income. That's because the funds themselves can sell at a big discount, which means you get more income for each dollar invested.

The irony, of course, is that Mrs Madoff really needs right now a financial adviser she can trust to handle her money.