February 1, 1998

Q. I am 33 and have $100,000 in a CD. Between the effects of inflation and taxes, it isn't going anywhere. What is the best way to invest for my retirement?

M.L., Santa Ana, Calif.

A. You've put your finger on the two critical elements -- making sure your retirement savings grow at a pace well in excess of inflation and keeping your hoard away from the taxman. And you're right -- CDs in taxable accounts aren't going to do the job. Since you are likely 30 years or more away from retirement, you can afford to take a very long-term view of these savings, and that view should take you inexorably to the stock market. Over a long haul such as this, it's reasonable to expect a stock portfolio to grow at an average annual rate of 10 percent or more. And if you are able to shield this money from the taxman, that would get your $100,000 to $2.1 million by the time you're 65 years old.

But again, you're likely to get there only if you keep the taxman at bay. So you'll want to use tax-deferred vehicles such as traditional IRAs, Roth IRAs, and variable annuities. If you earned $2,000 last year, you can put that amount into an IRA for 1997 -- you have until April 15 to make the contribution. That may give you a current tax deduction and will allow the money to grow on a tax-deferred basis until withdrawn in retirement.

Looking into 1998, you may want a Roth IRA, which requires that you pay taxes on the earned funds that represent the contribution, but in exchange there will be no future taxes, either on that $2,000 or its future earnings. And after that, you'll want to look at variable annuities, which are complicated instruments, but basically are mutual funds with just enough of a hint of insurance to sneak by as tax-deferred investments; thus the account can grow until your retirement years, and only then will the appreciation in the account become taxable.

As for investment vehicles, you want stocks -- nothing but stocks.

A great starting point for a retirement portfolio is a stock index fund that seeks to track the Standard & Poor's 500 index, the largest of which is the Vanguard Index 500 fund. A number of other companies offer similar entries.

Even though you'll be a long-term investor, I suggest you move slowly into the markets, spreading investments out over 36 months. First move most of the cash into money market accounts. If you earn 5 percent annual returns there, you would need stock investments of $3,000 a month to complete the program.

I would proceed this way: The first month make your entire 1997 IRA contribution of $2,000 and put $1,000 toward your 1998 IRA. Then put $7,000 into Vanguard's Prime Money Market account (a taxable fund) and $90,000 in a Vanguard Variable Annuity Money Market account. The second month, complete the 1998 IRA contribution, taking the money from the taxable account. The remaining $6,000 there will loaf there until you can make your $2,000 annual contributions for the years 1999, 2000, and 2001. In the third month, open a Vanguard Variable Annuity Equity Index account, at the minimum $5,000 level. This will put you $1,000 ahead of the game, but you could compensate in the fourth month by adding only $2,000. Then, from the fifth month on, $3,000 contributions should get you fully invested in three years.