I used to think $1 million would be enough to retire on, but now that I have that much in net worth I wonder how much I really do need in retirement. I am 44, married with no dependents. I work as a computer consultant. My annual income is $130,000, of which I plan on saving $50,000 annually. My portfolio is a mix of cash and municipal bonds. I plan on investing the cash in stock mutual funds when market conditions are more favorable. My goal is to retire in the next two or three years. I know I may have to be semi-retired until the mortgage is paid off. My biggest concern is having enough retirement income, especially with health insurance costs rising. I pay $585 per month for an individual health policy for my wife and myself. I get $40,625 a year in tax-free income from municipal bonds. When I retire, I plan to take early distributions from my IRA without penalty in equal periodic payments of $30,000 a year until I turn 59 1/2. I can take an early pension at age 55 from my previous employer of $3,082 a year. I can also take early pension distributions from my Keogh accounts at age 55. My living expenses are $3,000 monthly, including health care but not counting the $2,540 monthly mortgage payment. The mortgage will be paid off in eight years. -- B.T.

B.T.,

There's a stock market adage that says, "Every bull market climbs a wall of worry." My interpretation of the adage is that there's no green light, no talisman to let us know that now's the time to invest and be guaranteed success -- whether it's the overall stock market or an individual investment.

The bull market is a little long in the tooth, having just celebrated its 10th anniversary last month. Not coincidentally, the U.S. economy continues its economic expansion, the longest peacetime expansion ever recorded. Meanwhile the

Federal Reserve is trying to engineer a soft landing by wringing inflationary expectations out of the marketplace without bringing economic growth to a halt.

As a result, cash is yielding between 5% and 7% in taxable money-market funds, courtesy of the Fed's six increases in the

federal funds rate since June of 1999. Compared with the performance of stocks this year, that's looking pretty good.

Still, investing in cash requires a larger portfolio to provide the necessary income in retirement. Historically, an investment in cash has barely kept pace with inflation.

For someone at your income level, you appear to be prepared to live very frugally in retirement. Use a retirement

calculator to help estimate your expenses. Over the next eight years, you estimate you'll need about $66,480 a year to meet your needs (living expenses plus mortgage payment). Putting a 3% cost-of-living on everything but the mortgage payment translates into a need for income three years from now of $69,250 and eight years from now of $76,935. Once the house gets paid off, you'll need an estimated $50,000 in income in year nine.

Assuming an average portfolio return of 6% over the next three years, combined with additional annual investments of $50,000, the portfolio should be worth about $1.5 million. Can a portfolio of that size throw off $69,250 by the time you retire? Yes, it can. But beware: For now, you are limited to taking distributions from your taxable portfolio and annuity payments from your IRA. This may not be enough in the short-term, and you may find yourself cutting into your principal.

Annuitizing your IRA is a way to avoid paying the penalty for early distributions. But there's an upper limit to the size of the distributions, and it's based on your life expectancy using one of two different approaches. Annuitizing the IRA isn't going to allow you to take distributions of $30,000 annually without penalty. The

Internal Revenue Service

publication,

When Can I Withdraw or Use IRA Assets?

describes how you can annuitize the IRA without incurring penalties.

Remember, even if you won't pay a penalty, you still will owe income taxes on these distributions.

I like buying individual municipal bonds instead of muni bond funds. It gives you greater control over the cash flow and maturity of the portfolio, and you can easily control credit quality and reduce your credit risk by buying bonds that are insured. Even with that, I'm a little concerned that you've got 66% of your financial assets invested in two municipal issues. Illinois does not exempt in-state bonds from income tax so, as an Illinois resident, you have no inherent advantage in owning municipals issued in your home state.

There's no reason to dump these bonds in a fire sale, but I would work with your financial consultant to try to achieve some diversification in your municipal portfolio.

Muni investors also have to be wary of the alternative minimum tax, or AMT. Income from

some

municipal issues is counted as AMT income.

Elizabeth Roy's

feature on municipal bonds and the AMT provides more detail on this topic.

You need to start reinvesting in the stock market. If you're uncomfortable with investing in the stock market, start

slowly

and keep the investments well diversified. Try starting out investing 10% of your IRA in stocks. Use a no-load, index fund that tracks one of the broad-based indexes. An asset allocation of 66% munis and 37% cash is just too conservative for your retirement portfolio. You've done a great job accumulating this much wealth by age 44, but managing that wealth to meet your needs in retirement means more than just protecting principal.

Send In Your Portfolio

If you would like to submit your portfolio for a makeover, send it to portfoliorx@thestreet.com. Give us enough details -- dollar values or percentages -- so we can determine how your assets are allocated. Also tell us a little about yourself and your investing goals, and let us know how we can contact you if we have further questions. Though we'll only use your initials publicly, please include your full name so we can verify your identity. Unfortunately, we cannot guarantee that your portfolio will be selected for a makeover, nor can we promise to respond individually to everyone who submits a portfolio.

Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at

portfoliorx@thestreet.com.