I'm single, 38 and earn about $67,000 annually. From my salary, 7% is deducted monthly as my contribution to CalPERS, the California Public Employee Retirement System. This started when I took my new position in 1995, and it's my intention to remain in the public sector in California until retirement. If I retire at 55, I will receive a pension equivalent to about 40% of my highest salary. It's reasonable to assume that my salary may be in the high $70,000s to mid $80,000s by then. Aside from the mandated CalPERS deduction, I also contribute $700 a month to my tax-sheltered 403(b) program. In addition, $600 a month goes to the (VTSMX) - Get Report Vanguard Total Stock Market Index fund, and $100 a month to an annuity. These areas currently total about $15,000 and $7,000 respectively. I also have about $6,500 invested in the (ANEFX) - Get Report New Economy fund in a taxable account. I would appreciate advice on future options for my current $700-a-month tax-sheltered investment (it could increase to about $1,000 a month), plus future taxable investment strategies to reasonably achieve my goal. -- J.W.


Let's start out with your salary projections. Your projection of $85,000 has you earning an average annual raise of 1.4%. But a reasonable assumption for a public employee is that salary growth will approximate the inflation rate. We don't know what the inflation rate will average over the next 17 years until your planned retirement, but a figure of 2% to 3% seems reasonable.

Splitting the difference at 2.5%, we can project your annual salary 16 years out at $99,462. (I only went 16 years out, assuming you would have to actually earn that salary for a full year before it would count as your highest annual salary.) We can then estimate the 40% of your highest salary figure at $39,784.

What annual income level are you going to need in retirement? Your needs will depend on what you plan to do in retirement, whether your mortgage is paid off and what your lifestyle is. Using your current expenses to forecast future expenses is a sound method to build a baseline budget for retirement.

Multiply today's expenses by 1.52 to come up with an estimate for your annual expenses at age 55. That factor assumes a 2.5% inflation rate over the next 17 years, just like the salary projection. You can modify the assumptions by using the formula:

to solve for the factor. In this case:

When you retire at 55 you have seven to 14 years before you start receiving Social Security. Your full retirement age for Social Security benefits is 67, but you can receive reduced benefits at 62. When you retire at 55 you can do an IRA rollover of all or part of your 403(b) account, and start taking distributions from that account without penalty. This will allow you to close the gap between your pension payments and your planned spending. There are a lot of retirement calculators available. Try the

calculator at


to estimate your income gap in retirement. That will help you determine what you need to invest annually to meet your retirement goals.

Putting $700 aside each month in your 403(b) plan is great, and with 17 more years of doing that you'll have a nice retirement portfolio. It's more than most 403(b) plan participants do, but since you're late to the game and are looking to retire early, I recommend that you increase that amount to your Maximum Exclusion Allowance (MEA). Check with your plan administrator to determine your MEA, but you should be able to contribute up to $875 monthly, or $10,500 annually. That's an extra $175 a month but it won't feel like that because 403(b) contributions are made with pretax dollars, which reduces your taxable income and withholding taxes paid.

Stop contributing to the variable annuity in your 403(b) plan. There's no compelling reason to hold an annuity in a 403(b) plan, and a host of reasons not to own them in a tax-deferred account like a 403(b). Hap Bryant wrote a

primer on the topic for


that should help convince you that continued contributions to an annuity within a 403(b) is a belt, suspenders, boxers and briefs approach toward investing for retirement. Once you've stopped the contributions, figure out how much it's going to cost you to withdraw the money already invested in the annuity and reinvest it in another plan option. Then make your best decision concerning that money.

I think a strong argument can be made for making a no-load index fund a core holding in a portfolio. You've done that by using the

Vanguard Total Stock Market Index

, a very broad-based index fund, for more than half of your portfolio. If you feel strongly about a sector of the marketplace, feel free to put part of your portfolio in a sector fund, ideally one with no sales commission (also known as a "load") and reasonable annual expense ratios. Use the money you've stopped contributing to the annuity.

I hate paying loads on my mutual funds, so I was predisposed not to like the fund in your taxable account. But the fee's been paid, so you have to ask if the performance has met with your expectations and evaluate how the future looks for a service- and technology-oriented fund. You may decide it's time to move on.

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 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