(FORTUNE Magazine) – We'll go out on a limb and make the following assumption: It has been a while since you took stock of your financial well-being. We understand. Closing your eyes to how badly your various brokerage and retirement accounts have been mauled is a natural mammalian reaction, an involuntary survival instinct. In the financial equivalent to the "fight or flight" reflex, your mind has chosen flight all the way. To quote a line from Monty Python: Run away! Run away!

As we said, we understand. Nonetheless, although you may be under the impression that, given the sorry state of your finances, flight is the only viable option you have, it's not. You can fight back. We're not suggesting that you picket the Nasdaq or take your broker to court. (Okay, maybe just this once....) What we are suggesting is that you stand your ground and confront, well (how should we put this?), yourself. Your own assumptions about your future retirement, that is. Your own saving and spending habits. Over the pages that follow, we hope to scare you until your inner fight kicks in. Because, in the end, even the savviest financial planning isn't likely to be effective unless you think seriously about what might await you in the long term.

So get ready for FORTUNE's version of Fear Factor, where we challenge the historical assumptions of those popular Web retirement calculators with a few cold hard facts. Not that this little exercise is devoid of hope. There is some good news here. You will retire. You'll just have to make some tradeoffs. And by turning our financial reality check into a full-fledged financial checkup, you can dramatically improve your chances of living as sweetly as you've dreamed in your not-so-old age. We've corralled all the info you need, complete with the key questions to ask and the best websites to help you make tailored projections. In fact, as you consider each of the challenges below, the main question you have to ask yourself is, "Fight or flight?"

ASSUMPTION You can retire comfortably on 70% to 80% of your pre-retirement income.

REALITY Skyrocketing health costs mean you'll probably need 100% of your current income.

WHAT TO DO Run the numbers.

Conventional wisdom holds that most people can count on spending only 70% to 80% of their pre-retirement income in their golden years. After all, many of the big-ticket costs you incur during your working life, like commuting, contributing to your 401(k) account, and buying designer clothes to impress your clients, will disappear. What's more, your tax rate may be lower, and your mortgage will (hopefully) be paid off.

But here's something else you need to factor into the equation: rocketing healthcare costs. Believe it or not, they could easily outstrip those other savings. Don't expect Medicare to pick up the tab once you hit age 65; it covers only about half of the average person's medical expenses in retirement. What it doesn't cover, including the cost of prescription drugs and hefty deductibles for hospital stays, can be enormous. Premiums for so-called Medigap insurance (which bridges what Medicare doesn't cover) plus out-of-pocket expenses frequently top $10,000 a year. And that doesn't include expenses for long-term care, such as nursing-home services, which in today's dollars can easily top $50,000 or more per year.

That's just the situation today. Problem is, most experts predict that those costs will continue to escalate rapidly. A 2002 study by benefits firm Mercer Human Resource Consulting shows that the percentage of big companies that expect to continue offering health benefits to retirees has shrunk to just 23% in 2001. And those that offer benefits in the future will be kicking in far less. Consulting firm Watson Wyatt estimates that employers that do offer coverage will pick up less than 10% of total retiree medical expenses by 2031, compared with about 50% today.

For the typical would-be retiree, the numbers can be downright chilling. Let's say you're 55, plan to retire in ten years, will receive no retiree health-care coverage from your employer, and live in an area with relatively low medical costs. If health-care costs, which are now growing at 14% annually, moderate to 5%--an optimistic assumption--you'll need to have saved $163,000 by the time you're 65 to cover your medical expenses alone to the age of 90 (see chart on this page). But if costs continue to increase at the current rate, you'll need a whopping $702,000. And remember, if you go into a nursing home, you'll likely need more.

So, yes, if you're going to play it smart, start by assuming you'll need 100% of your pre-retirement income to get you through your later years--at least in the comfort and style you'd like. You might be able to get away with less, and--who knows?--maybe when you're ready to retire, revolutions in health care will bring the costs way down. (Hey, anything's possible.) But whatever the future holds, you should gather some crucial data right now. First, determine your eligibility for employer-sponsored post-retirement health-care coverage by checking with your human resources office at work. If benefits are available, find out how much they cover. Then click over to www.choosetosave.org and check out the interactive retiree health savings calculator put together by the American Savings Education Council. It will estimate how much you'll need to stash away today to cover your health-care costs in retirement under various scenarios, including when you plan to retire and your life expectancy.

ASSUMPTION Your pension, plus Social Security, will cover at least half your expenses in retirement.

REALITY You'll have to cover most of your monthly nut with your own savings.

WHAT TO DO Fund your 401(k) at least enough to get your company match, and contemplate saving much more.

Your retired parents seem to be doing fine financially, and you earn more than they ever did. So you'll be fine too, right? Not necessarily. A very big chunk of those who retired before 1990 spent their entire careers with the same employer during a time when company pensions and retiree health-care benefits were next to sacrosanct. As a result, they now have it "better than any generation before them or any that will come after them," says Dallas Salisbury, CEO of EBRI. "Your world is going to be entirely different."

In the good old days, retirement security was compared to a three-legged stool, supported by your company's pension plan, Social Security, and your own savings. Today retirees covered by company pensions receive on average 21% of their retirement income from those plans, according to Watson Wyatt. Another 42% comes from Social Security. Twenty-one percent comes from personal savings, including 401(k) accounts. The final 16% is income from part-time work.

Most of us already know that Social Security benefits are dwindling: By the time a 30-year-old hits age 65, some optimistic experts predict, he'll get 75% of what today's 65-year-old gets, in real dollars. (Some less starry-eyed types predict he'll get zilch.) The picture is worse when you look at defined-benefit pension plans--the kind in which your employer contributes all the money and benefits are based on years of service and final average pay. The share of American workers with such pension plans has slipped in each decade, to about 20% now, with more cuts to come (see "Bye-Bye Pension" on fortune.com).

All this means that when it comes to saving for retirement, you are now pretty much on your own. And how well you fare will hinge largely on how much you're willing to pour into your battered 401(k) account--plus outside accounts earmarked for retirement--and the annual rate at which those contributions grow. Outside accounts? That's right. If you want to have a comfy rather than a spartan retirement, you'll need to tap assets outside your 401(k), and even outside tax-advantaged retirement plans.

Financial pundit Suze Orman (see story on page 82) argues that you should pay down your mortgage and other debt before saving anything for retirement beyond what you must put into your 401(k) to get the company match. We'll let you make up your mind about that one. But once you've amassed an adequate emergency fund and brought your debt under whatever kind of control feels right to you (read on for more), take maximum advantage of tax-deferred savings vehicles. Those include 401(k)s (the 2003 contribution limit is $12,000, or $14,000 if you're 50 or over), IRAs, and, for the self-employed, Keogh plans. You should also contribute to a Roth IRA if you qualify. Unlike contributions to a 401(k), payments into a Roth account must be made on an after-tax basis. But when you withdraw the money at retirement, you don't pay any tax. The contribution limit to a Roth IRA is $3,000 for 2003; if you're 50 or older, you can throw in another $500. It also wouldn't be a bad idea to earmark an additional investment account for retirement and begin funding it regularly. If you wind up not needing it, your kids will be that much happier with their inheritance.

ASSUMPTION On average, you'll get an annual return of 8% to 10% on your retirement savings.

REALITY You'll be lucky to get 6%.

WHAT TO DO Tweak your asset allocation--and save more too.

As bad as the bear market of the past three years has been, investors have been comforted by one seemingly rock-solid axiom: Over the long haul you can expect your investments to grow 10%--or 8% if you're "conservative"--annually. But investors who cling to that assumption are "really rolling the dice," says Robert Arnott, chairman of Pasadena investment firm First Quadrant and editor of the Financial Analysts Journal.

Here's why. The average 401(k) portfolio comprises about 70% stocks and 30% bonds and other fixed-income investments such as money-market accounts. Money-market accounts currently yield almost nothing. Ten-year Treasuries yield about 3.5%. Corporate bonds, which are by definition riskier than government bonds, yield more. Still, most financial experts today believe that investors can reasonably expect to get a long-term annual return of no more than 5% on a conservative mix of government and corporate bonds. Do the math, and you see that the average 401(k) holder would need to average more than a 9% return on the stocks in his portfolio to earn an 8% overall return, and a whopping 12% to achieve a total return of 10%.

Those hefty stock returns are simply not realistic. A far more reasonable long-term rate of return is 6% to 8% (see "Can Stocks Defy Gravity?" on page 44 for the reasons why). Factoring in the bond portion of the average 401(k) portfolio means that investors are far more likely to achieve overall investment returns in the neighborhood of 6% annually. That's not even including fees that can easily whack off 1% to 2% for actively managed mutual funds.

To maximize those returns without overdosing on risk, now is a good time to reassess your asset allocation. Thanks to this bear market, you may have more or less money tied up in any one particular asset class than is optimal. And while asset allocation isn't a one-size-fits-all exercise, financial-planning experts do have some general guidelines. A recent FORTUNE survey of financial planners found that the most widely recommended model retirement portfolio for a 30-year-old contains 85% stocks and 15% bonds. For a 45-year-old, it's 70% stocks, 30% bonds. For a 60-year-old, it's 60% stocks, 40% bonds. To get more guidance and tips on the mix within the stock and bond portions of your portfolio, visit morningstar.com.

ASSUMPTION You can retire at 60.

REALITY If you do, you might very well outlive your money.

WHAT TO DO Plan on working longer--or part-time in retirement.

FORTUNE asked Michael Steiner, a financial planner with Regent Atlantic Capital in Chatham, N.J., to crunch the numbers for a hypothetical 30-year-old college-educated professional earning an annual salary of $75,000. We assumed that our guy did the usual things: got married, bought a house, had a couple of kids. He had to struggle to contribute 6% of his annual salary to his 401(k) account during his first 15 working years, after which he bumped his contributions up to the legal maximum. Steiner also assumed an annual inflation rate of 3%, salary increases of 3%, pretax investment returns of 6%, and an employer matching contribution equal to 3% of his salary.

The result? Steiner calculates that if our man intends to retire by age 592--the earliest you can make tax-free withdrawals from your 401(k)--he would need to have amassed $3 million (assuming he'll spend 100% of his final pay in retirement and live to age 90). But at that point, he'd have accumulated only $1.2 million. He'd run out of money by age 68, even factoring in Social Security benefits. If he worked until age 67, his money would last until age 84. That's better, but if he plans on living a good long while, it's still not enough.

If you're like him, something's got to give. And if saving more seems impossible, then that something has to be the number of years you work. (Of course, the longer you work, the longer you keep your employer-provided benefits--another reason to keep heading to the office.) One obvious lesson is to think twice before accepting that seemingly generous buyout offer from your downsizing employer. "Don't quit the best-paying job of your life unless you're absolutely convinced you're ready to leave the labor force," says EBRI's Salisbury.

ASSUMPTION You can easily cover your kid's college costs if you stash away a few hundred bucks a year.

REALITY If Junior wants to go to private school, forget it.

WHAT TO DO Look into so-called 529 college savings plans--or simply make peace with the idea of your kid taking out loans.

Health care isn't the only expense that's growing far faster than inflation. The cost of a college education has been growing by some 5% a year at private schools and a whopping 9% a year at public ones. The average cost, in today's dollars, for tuition, room, and board at a four-year private college is about $25,000 a year. Assuming those costs continue to grow at a rate of about 5%, the total bill for a four-year college degree will be a heart-stopping $259,000 by the time your newborn graduates. Assuming further that your savings generate an annual return of 6%, you'd have to set aside about $550 a month, starting the month your child is born and right up until the day he gets his diploma, to cover them.

Market forces, perhaps, will moderate that college bill somewhat: After all, if only a handful of people can afford to send their child to Yale, then Yale may have to go on sale. And if not, well, take comfort from the fact that the numbers are considerably better at the University of Michigan, U.C. Berkeley, or any other great state school. To fully fund the typical public-college education, you'd have to save about $200 a month.

Still, it's pretty clear that you'll have to make some painful tradeoffs. While striving to spare your child from the burden of graduating with tens of thousands of dollars in debt may be a noble goal, planners warn that it simply cannot take priority over saving for retirement. "You can always borrow for college," says financial planner Steiner, "but I don't know anybody who will loan you money for retirement."

That doesn't mean that you can't lend Junior a hand. And once again, the first step is to tally up how much you'll need to save. Use the calculator at www.savingforcollege.com to determine the total cost of a four-year education and the amount you would need to save to reach that goal. Once you've figured out how much of a contribution you can handle, your best bet is to put the money into a state-sponsored 529 plan, which allows money earmarked for college to grow free of federal taxes. The amount you can set aside varies from state to state: In New York it's $100,000; in North Carolina it's $276,000. Depending on where you live, you may also enjoy a deduction on your state taxes. Another advantage: Once your child reaches college age and you take out the money to pay for tuition, room, board, books, and fees, you need not pay tax on the withdrawals. Each state offers a variety of 529 investment offerings; the website above offers a comprehensive list.

ASSUMPTION You need three months' worth of living expenses stashed away for emergencies.

REALITY You need at least six months' worth.

WHAT TO DO Start saving, buster.

In fact, you may need an emergency fund of up to a year's worth of expenses if you work in an industry hit hard by layoffs or are your family's sole wage earner. The average time it takes to find a job is now more than four months, according to John Challenger of outplacement firm Challenger Gray & Christmas. For the record, that's a 19-year high. And in this recession, it's not uncommon for many laid-off professionals to be out of work for a year or more. (Don't assume that a home-equity loan can come to the rescue, by the way. Once you lose your job and your income drops, you may not be able to qualify for such a loan.)

Saving up an emergency fund, of course, will require cutting spending. Money-management software such as Quicken can help you spot expenditures ripe for trimming. Once you've got the fund, keep it in a safe cash account. Consider it sacred. That means you do not--repeat, do not--raid it for "emergencies" like an in-home theater system, a tummy tuck, or a summer-house rental.

What if you have only a paltry emergency fund right now, but you also have other pressing financial needs, like paying down credit card debt and saving for retirement? Most financial planners agree that you should pay down non-tax-deductible, high-interest-rate debt (like that on your plastic) first. Then beef up your emergency fund. But throughout it all, keep contributing something to your tax-advantaged retirement accounts--certainly enough to qualify for 100% of your employer's matching contributions. "Saving is a habit," says Norm Boone, a financial planner in Oakland. "If you get out of the habit of making contributions to your retirement plan, it's going to be tough to get started again--even if you were holding off for an equally good purpose."

ASSUMPTION Refinancing your mortgage was a no-brainer way to free up extra money.

REALITY You've just trained yourself to live larger than you can afford.

WHAT TO DO Pretend that your monthly mortgage payment hasn't changed.

Last year homeowners drained some $330 billion in cash from their houses by refinancing their mortgages and taking out home-equity loans. According to the Federal Reserve, they've used only about one-third of that money to pay off credit cards and other debts. The rest they've been assiduously salting into retirement and college savings, right? Wrong. They've been blowing it, on everything from vacations to cars.

With interest rates at all-time lows, all that debt has so far been fairly manageable. But that could change in a hurry if interest rates increase sharply. Another worry: the looming specter of deflation. If your income falls, your debt payments will stay fixed--a big problem if your household owes a lot.

If you haven't yet refinanced, advises financial planner Boone, replace your 30-year mortgage with one that has a shorter term--say, 20 years--and the same or even slightly higher monthly payment. There are two huge advantages to doing so. One, you'll probably pay tens of thousands less in interest over the life of the loan. For example, replacing a $200,000, 30-year mortgage at 7% with a 5.25% 20-year mortgage will save you a whopping $156,000 in interest payments. Two, you'll free up the cash you had been devoting to the mortgage ten years sooner, letting you redirect it to goals like--oh, I don't know--retirement.

What if you've already refinanced with a 30-year term? You have a couple of options. If your lender allows it (call to make sure), take the extra cash and plow it back into your mortgage. By making extra principal payments, you'll pay your house off years sooner. If your bank doesn't allow you to do that, then funnel the extra cash into a retirement savings account. Both of these options involve discipline. To strengthen it, arrange for your bank to make automatic monthly payroll deductions into your savings account or automatic transfers from your checking to savings account.

Save more, spend less, work longer. We warned you this was scary stuff. But hey, you can't keep running forever.