(MONEY Magazine) – When do you think about retirement? During idle moments, when thoughts turn to chucking your job and heading to the beach? Or is it every time you buy a stock, pay your mortgage, start a new job or take any one of the other small steps that over a lifetime will--you hope--add up to financial security? After all, much of our financial behavior is about retirement: saving enough now so we can prosper when we get there. And along the way, of course, we have questions. So in the story that follows, we take on 15 major ones. You'll find the tools you need to make the right decisions, including the best online resources. Plus, on page 93 we suggest eight ideal stocks for long-term retirement portfolios. Finally, we examine the lifestyle of retirement: our "Best Places to Retire" feature (page 98), a profile of a town that's becoming the country's top retirement spot (page 108) and a close look at the sometimes troubled transition to retired life (page 114). But first, the questions. Turn the page to begin.

Am I saving enough?

This is the most often asked--and perhaps the most difficult to answer--of all retirement questions. Coming up with the answer requires you to make an enormous number of assumptions--how much you'll earn as time passes, what you'll be able to save, how your investments will grow, how you'll spend your retirement, what'll happen to the economy. It's enough to make you crazy. Plus, deciding how much to save inevitably involves trade-offs. Should you mortgage the present for an uncertain future? Would you prefer to live modestly today--or tomorrow?

But rather than throwing up your hands, start by calculating how much you are saving now. One benchmark to consider is the national savings rate: a meager 2.4% of household income. A more aggressive benchmark is what the average MONEY subscriber socks away: an impressive 14.8%.

The next step is to choose a savings target for the future. Recognize that saving isn't a straight line. There are times--when college bills come due or the house needs a boiler--that finding $50 a month may be impossible. Other times, you may get a windfall. Still, most people are better off with a plan.

Sam and Diann West, both 43, regularly use online calculators to fine-tune their savings goal. The Lenexa, Kans. couple knew early on that they'd like to travel in retirement. "We're also planning to make sizable contributions to our church," says Sam. "We want the flexibility of living, not just simply being alive." Having a target has already helped them save $1 million toward the $2.5 million they figure they'll need to retire.

To come up with your own "magic" number, try our worksheet on page 81. Then consult the online calculators at www.money.com or at one of the other sites recommended on page 77.

Finally, be vigilant about bottom-up planning to make the most of the resources you have.

--Maximize contributions to your tax-deferred plans. That means never passing up the chance to put pretax dollars to work in a 401(k) or other tax-sheltered plan (for eligibility rules, see the table on page 78) and always taking full advantage of free benefits, such as an employer 401(k) match.

--Keep spending in check. Coming up with a few more dollars a month can prove significant over time. Thanks to the power of compounding, investing another $50 a month in a tax-sheltered plan for 20 years will add nearly $30,000 to your stake, assuming an 8% average annual return.

--Stay financially flexible. Free yourself from high-interest debt by paying off a credit-card balance before you save. That guarantees a double-digit payback--and leaves credit available for borrowing in case of an emergency.

--Boost your earnings. What you can afford to set aside is related to how much you bring in. Remember, salary growth compounds too. --L.H.

How should I invest?

The bedrock of any retirement portfolio should be stocks or stock mutual funds. Not because stocks have soared over the past decade. And not because stocks have recently declined, creating a buying opportunity. But be-cause of inflation: Historically, only stocks have provided enough long-term growth to keep you ahead of inflation. That's why, even once you've retired, stocks should be a significant part of your portfolio. (For eight suggestions, see "Bull's-Eye Stocks," page 93.)

But should stocks be your entire portfolio? No. As we've seen with the recent 30%-plus Nasdaq drop, stocks' volatility can be painful. Bonds deserve a place in your portfolio. (See the bond question, page 77.) Figuring out how much to allocate to stocks vs. bonds is a critical decision. Too aggressive and you run the risk of being decimated when stocks go down. Too conservative and you may not be able to fund the retirement lifestyle you want.

What's the ideal mix? There's no one-size-fits-all answer. The right one for you depends in part on your time horizon--as a rule, if retirement is still a long way off, you will want at least 60% of your assets in equities. It also depends on your risk tolerance. How do you know how much risk you can tolerate? "What you've done the last few months is a test," says Scott Lummer, chief investment officer of online advisory firm mPower. If the recent stock market pummeling kept you awake at night, you're probably too heavily invested in stocks.

You should recalculate your stock/bond mix at least once a year. You may also want to check out a few online allocation calculators to see how your mix compares with the allocations suggested for your age and goals. (See the site list at right.)

You should also calculate your exposure to specific industries periodically. Lured by the promise of hot returns, many investors have too much of their money in high-priced tech stocks. We're not telling you to shun those high fliers, but recognize the risk you're taking. History has shown again and again that investors who disregard diversification get crushed.

If you decide you're overweighted in an industry or asset class, reshuffle within tax-deferred accounts so you don't take a hit from Uncle Sam. Or adjust your portfolio by putting any new money into underweighted areas.

Finally, one rule can be put bluntly: Don't trade more than is absolutely necessary. We understand the thrill of trading. But nearly every study of frequent trading has concluded that it's a loser's game. Transaction costs and taxes handicap your portfolio. Buy and hold may be a boring mantra, but it makes sound economic sense. --A.F.

What are the best funds for retirement?

We'd all like to find the next great outperforming fund to power our retirement savings. But that's a game that's hard to win. Over the past 10 years, only one in four U.S. stock funds has beaten the S&P 500. And if you go out more than 10 years, the numbers drop further still. Indeed, of all the 847 U.S. stock funds that have been around for nine years, only one has outearned the S&P in each of those years. That's why we'd make the foundation of any retirement portfolio a fund that virtually matches the market's return: an S&P 500 index fund, such as the Vanguard 500 Index (www.vanguard.com; 800-851-4999).

For a long-term investor, as we've often said, index funds have a built-in advantage: The expenses incurred in running them are modest and their trading costs and taxable distributions are minimal. In addition, they are by definition broadly diversified.

You can even build an entire portfolio of index funds. If you already own an S&P 500 fund, you can capture the rest of the U.S. stock market with the Vanguard Extended Market Index. To home in on small stocks, add the Vanguard Small Cap Index. Or get the whole pie at once in the Vanguard Total Stock Market Index. For overseas exposure, try the Vanguard Total International Stock Index.

If the asceticism of index investing isn't appealing--or your company plan doesn't give you that option--here are two places to assess other choices: First, our guide to the 20 biggest retirement funds. This guide, which appeared in our May issue, is available, with updated performance data, at www.money.com/retirement. The second source is the MONEY 100, our exclusive selection of low-cost, well-managed funds. This list, compiled and refined over three years, includes aggressive sector funds like T. Rowe Price Science & Technology (www.troweprice.com; 800-638-5660), value players like Clipper (www.clipperfund.com; 800-776-5033) and that one fund that has beaten the market in each of the past nine years, Legg Mason Value (www.leggmason.com; 800-577-8589). The latest edition appeared in our June issue; updated data can be found at www.money.com/money100. --L.L.

What about bonds?

You need bonds for one simple reason: security. Bonds will dampen the volatility of a stock-heavy portfolio and cut your risk. (For a full explanation, see Investing 101 on page 65.) The difficult part is deciding which bonds to own: government or corporate, short-term or long-term, high-yield or tax-exempt.

The easiest solution is to invest in a broadly diversified bond fund, like Vanguard Total Bond Market Index (www.vanguard.com; 800-851-4999) or the actively managed Harbor Bond (www.harborfund.com; 800-422-1050). But bond funds do give you less certainty. When interest rates rise, a fund's value will drop. If you own a bond itself, however, you needn't worry: Hold your bond until maturity, and you'll get your principal back.

The downside of individual bonds, of course, is that you need to do more work--and commit more money--to build a diversified portfolio. Which bonds should you start with? U.S. Treasuries. Their default risk is negligible, they are available in denominations of $1,000 and you can buy them cheaply from the government via TreasuryDirect (www.publicdebt.treas .gov; 800-943-6864). Plus, they're highly liquid, so if you need to sell, you can do so easily. Today the best deals are on Treasuries with two- to five-year maturities, which are actually paying higher yields than long-term bonds.

Even better for retirement investors may be Treasury Inflation-Protected Securities, or TIPS. You get interest and the face value grows at the inflation rate, ensuring an inflation-beating return. You can buy them straight from the government too. One caveat: Put them in tax-deferred accounts so you won't owe taxes each year on the inflation adjustments.

If you want to invest in TIPS outside of a retirement account, buy inflation-adjusted U.S. savings bonds, or I Bonds, which currently yield 7.49%. As with regular savings bonds, the interest is added to the bond's value, so you don't owe taxes until you cash it in. And you can use a credit card to buy up to $500 worth per purchase at www.savingsbonds.gov.

Tax-exempt munis are also a smart choice for high-bracket taxpayers' taxable accounts. The current average yield on a 10-year AAA muni is 5.5%, the equivalent of an 8% taxable yield if you're in the 31% tax bracket and 9% in the 39.6% bracket. Munis come in high denominations, so building a diversified portfolio requires a significant investment--and a broker. Or go with a fund. Stick with those that have an average credit quality of AA or better and charge low expenses--aim to pay less than the average expense ratio of 0.98%. That information will be in the prospectus. --L.L.

What assets should I put in tax-deferred accounts?

For all their tax advantages, most retirement accounts carry one potential tax liability. When you take out your money in retirement, the earnings are taxed at regular income tax rates, which can run as high as 39.6%, not the 20% rate for long-term capital gains. One exception: a Roth IRA. As long as the Roth has been open for five years and you're at least 59 1/2, earnings can be withdrawn tax-free. Given these differences, here are the types of investments best for different accounts--and those best left outside.

--Traditional IRAs and 401(k)s. If you expect to trade stocks--or rebalance your portfolio-- do so in these accounts; you won't owe taxes now on your profits. In general, says financial planner Michael Chasnoff of Advanced Capital Strategies, put moderately aggressive growth and income-producing stocks and funds in these accounts. For the fixed-income portion, invest in taxable bonds, including inflation-adjusted bonds.

--Roth IRAs. Again, a perfect place to trade. Since Roth earnings are tax-free, fund the account with stocks and mutual funds that you believe will produce the biggest gains. One drawback: As with any tax-deferred plan, if your investments tank, you're not allowed to write off the losses as you could in a taxable account.

--Outside of plans. Keep tax-efficient investments--such as index funds, municipal bonds and stocks that you're likely to buy and hold well into your retirement--outside of sheltered plans. The 20% long-term capital-gains rate you'll pay is likely to be less than your income tax rate even in retirement. --L.H.

Should I buy an annuity?

Variable annuities offer the same investing options as mutual funds, plus the tax deferral of IRAs and 401(k)s. So what's not to like? Onerous annual fees--2.1% on average--and surrender charges of 6% to 9%.

Variables make sense only if you want a retirement income that you won't outlive. Through a process that goes by the ungodly name of annuitization, a 67-year-old man with $100,000 in a variable annuity could elect to receive payments for life that start at $621 a month. The amount will change over time, depending on the investment returns of the underlying funds. But the trend should be upward. For example, a steady 8% annual return after expenses would boost that initial $621 to $950 after 10 years and to $1,455 after 20 years. That would likely keep your buying power ahead of inflation.

If that prospect is appealing, the next question is when to buy a variable. If you're positive you'll opt for a lifetime income, you can buy one early on--in your forties or even earlier--and rack up tax-deferred gains until you annuitize. But if it turned out that you had to liquidate your annuity within 15 years or so, the fees and the tax hit (as with other tax-deferred accounts, withdrawals are taxed at ordinary income rates, not the 20% capital-gains rate) would probably leave you with less money than if you had invested in a decent fund. A more prudent strategy: Wait until you're close to or in retirement to buy a variable--and then annuitize. If you do opt for a variable, go for one with low fees, such as those sold by eAnnuity (877-569-3789), T.D. Waterhouse (800-622-3699) and Vanguard (800-523-9954). (For more, see "One (Small) Cheer for Variable Annuities," originally published in MONEY's January issue, at www.money.com/retirement.) --W.U.

Should I be debt-free by retirement?

It has a nice ring to it: debt-free. But whether you should be debt-free, in retirement or earlier, depends on the kind of debt. At one end of the spectrum is credit-card debt--typically high interest, with no tax perks. At the other is a low-rate, deductible mortgage.

If you're still saving for retirement, ask yourself whether you could earn more on the money than you're paying in interest. As Westerly, Rhode Island financial planner Malcolm A. Makin explains, "If I can borrow money at 6% and earn 8%, and I have plenty of cash flow to pay off that loan, I am golden."

High-interest debt doesn't pass that test--so get rid of it. The average standard credit card charges 16.7%, so a $5,000 balance would cost you more than $800 a year in interest. Lacha Palomino, a 31-year-old Delta flight attendant from Overland Park, Kans., recently woke up to just how much her $12,000 credit-card debt was costing her. Upset with her free-spending ways, she cut up her cards and vowed to be debt-free by next spring. At the same time, she's upping her 401(k) contributions to 22% of her salary, matched at 50[cents] on the dollar. "I have a goal set now and a budget," she says.

With a mortgage, if you're far from retirement, the answer is equally clear. The cost of a 30-year fixed-rate mortgage is still a relatively low 8.3%, and the interest is tax deductible. Given that, there's little reason to prepay it.

In retirement, however, you'll tend to think about these decisions differently. The reason: cash flow. Once you've stopped receiving a salary, you'll need to figure out where you're going to get money to pay the bills. Many retirees find enormous peace of mind in getting rid of their largest monthly expense. "You can make the numbers look however you want," notes Phoenix financial planner Stephen Barnes. "The bigger question is how comfortable do you feel carrying a mortgage?"

And repaying your mortgage opens up a potential source of cash: a reverse mortgage. With this loan, essentially a mirror image of a conventional home loan, the lender pays you. You must be 62 to qualify, and the older you are, the more you can borrow. The cash isn't taxed (it's considered loan proceeds) and the loan typically doesn't come due until you die, sell your home or stop living in it for 12 months. The drawbacks: high closing costs and the risk that you'll leave nothing for your heirs. For more, check out www.reverse.org. --A.F.

How do I save for college tuition and retirement?

Any parent who's snuck a look at the $23,000 average annual cost of a private college knows that saving for your kid's education can get in the way of retirement planning. When you can't find money for both, you may favor college savings. Don't do it. As David Rhine, director of family wealth planning at BDO Seidman in New York City, suggests, "Fill up your retirement bucket first." From loans to financial aid, there are plenty of ways to soften the cost of college. No one will award you a retirement scholarship. Even colleges recognize that retirement savings are sacrosanct; when determining aid eligibility, they don't expect you to tap your tax-sheltered retirement funds.

That said, don't neglect college planning altogether. While about 70% of students receive some sort of financial aid, according to the College Board, 60% of that assistance is in the form of loans, not grants. When you're scraping up money for college and retirement, you should stretch your dollars as much as possible by taking the following tax breaks.

--Custodial accounts. Once you set up what's commonly called an UGMA or UTMA in your child's name, you and your spouse can give up to $20,000 a year without triggering gift taxes. Until the child turns 14, the first $700 in income is tax-free; the next $700 is taxed at the child's rate; anything above that is taxed at your rate. Once the child is 14, all earnings are taxed at his or her rate (presumably lower than yours). The money can be used only for the child's direct benefit, however, and the child gets full control at age 18 or 21, depending on your state. Also, since it is in the child's name, it may reduce chances of getting financial aid. The tax benefits have been the deciding factor for Mark and Robyn Feinberg of Atlanta, who have funded custodial accounts for their children for almost a decade. As a result, the Feinbergs already have about $50,000 put aside for Joel, 9, and Amy, 5.

--State-sponsored savings plans. The money you invest in these so-called 529 plans grows tax deferred until you withdraw it for college expenses, at which time it's taxed at the student's rate. While your state plan may offer additional benefits to residents, you don't need to invest locally; nearly half of the 41 state plans are open to out-of-state residents. For more, go to www.collegesavings.org.

--Roth IRAs. While we're not suggesting that you endanger your own retirement, don't forget that you can make penalty-free withdrawals from Roth IRAs for education expenses. --L.H.

How do I get started with a small amount of money?

If you're ready to invest but have only a small amount of cash, there's no reason to delay. Indeed, investing small sums of money on a regular basis, known as dollar-cost averaging, is a highly effective technique. Some terrific mutual funds allow you to open an account with an initial investment as small as $250--for instance, money 100 funds TIAA-CREF Growth Equity (www.tiaa-cref.org; 800-223-1200) and EuroPacific Growth (www .americanfunds.com; 800-421-0180).

What if you want individual stocks rather than funds? Consider a dividend-reinvestment program, or DRIP. More than 1,300 companies, from General Electric to Exxon Mobil, allow you to buy a single share (usually through a broker), plow any dividends into additional stock and make regular additional investments through automatic paycheck or bank account deductions. Some will even sell you the first share. "It's a very cost-friendly way to invest," says Charles Carlson, editor of Drip Investor.

The strategy worked well for Julie and Ken Werner of Warner Robbins, Ga., who began buying stock through DRIPs 14 years ago and now consider their 19 DRIP stocks (including Wal-Mart and Boeing) a core part of their $350,000 portfolio. "I was able to drip my way into the stock market," laughs Julie, 47, who handles the couple's investments.

The Internet has made finding DRIPs that meet your criteria easier. Good places to start: Drip Central (www.dripcentral.com), Drip Investor (www.dripinvestor.com) and Netstock Direct (www.netstockdirect.com). --A.F.

Can I count on Social Security?

Some financial planners routinely advise savers to enter a goose egg on the Social Security line of a retirement worksheet. Assume no benefits, the argument goes, and save more on your own. Well, you needn't take such an alarmist approach. Rumors of the death of Social Security have been widely exaggerated. In fact, the system's trustees recently reported that the retirement fund has gained another three years of solvency; it won't come up short until 2037, at which time it'll be able to pay 72% of the promised benefits. That's a sizable gap, to be sure, but with 37 years for politicians to phase in corrective changes, it's one that can be bridged.

Of course, future benefits may not be as generous as today's ($907 a month for a man, on average; $699 for a woman). Still, there's good reason to believe you'll collect something from Social Security--but perhaps not as soon as you'd expected. Under a 1983 law that takes effect this year, the full retirement age (FRA) for Social Security is pushing past 65. If you turn 62 this year, for example, your FRA is 65 and two months. By 2005, the FRA rises to 66 for anyone born from 1943 through 1954. Thereafter, it goes up by two months a year until it hits 67 in 2022 for everyone born in 1960 or later.

--The cost of retiring early. As the full retirement age goes up, the penalty for retiring early becomes steeper. You can still collect benefits as early as age 62, but they'll be permanently reduced based on when you start. When the FRA was 65, for example, the benefit at age 62 was 80% of what it would have been if you'd waited till 65. With an FRA of 66, it's 75% of the full benefit; and at an FRA of 67, it's 70%.

So does it pay to take Social Security early? The answer hinges largely on how long you live. If you carry the Methuselah gene, you'll get more money out of the system by waiting until your FRA to start collecting benefits. For example, if you have an FRA of 66 and take benefits at 62, you'd pull more out of the system until the age of 78. Then you'd begin to fall behind people your age who waited to collect the full benefit.

Also, if you live a long life, the benefit reduction that felt painless in the early years of retirement could pinch in old age, when your other assets may be dwindling and you can't work to supplement your income. Moreover, for most retirees, Social Security is the only component of a retirement income that is automatically adjusted for inflation. Why reduce it?

Here's another reason to wait: If your benefit is larger than your spouse's and you die first, your spouse's benefit will be increased, but the size of the boost depends in part on when you claimed your benefit. Say you're on track for a full benefit of $1,100 a month at age 66, and your wife is on track for $700 a month. If you start collecting benefits at age 62, you'll receive $825 a month (plus inflation adjustments). When you die, your wife's benefit will bump to just $908 (plus the adjustments), rather than to the $1,100-plus level of your full benefit.

--The earnings penalty. Finally, if you start your benefits early and keep working, the higher full retirement age means that you'll face an onerous earnings penalty--that is, you'll forfeit some or all of your benefits--for longer. This year, Congress repealed the earnings penalty for Social Security recipients who've reached their FRA--but not for younger people who are drawing benefits. Between the time you turn 62 and Jan. 1 of the calendar year of your FRA, you'll lose $1 in benefits for every $2 you earn above a certain annual limit. The limit, currently $10,080, is adjusted upward each year in line with the national average wage. In the months before your birthday in the year you reach your FRA, the penalty goes down: You'll lose $1 in benefits for every $3 you earn above an annual limit ($17,000 in 2000, $25,000 in 2001 and $30,000 in 2002, with yearly adjustments thereafter). --T.T.

What do I have to do to retire early?

The short answer: do everything we've already recommended, but do it in overdrive. Retiring early is an aggressive act and requires aggressive preparation. So max out your tax-deferred accounts, load up on low-cost stock index funds, control your spending, avoid high-rate credit-card debt like the plague and don't even think about borrowing from any of your retirement accounts.

Then there are the special issues that early retirement presents. Here are three of the big ones--and strategies for addressing them.

--Income. The earlier you retire, the more important it is to put off tapping tax-deferred retirement principal. You want those funds to keep compounding as long as possible. Where will you get the money to pay the bills?

For Bruce Martin, 54, of Milwaukee, the extra income he needs for his semiretirement comes from real estate and stock investments. More than 20 years ago, he and his late wife Wanda took second jobs and saved $20,000, enough to buy a duplex they turned into a rental property. As their income and savings grew, they began planning to retire at 55. They calculated that they'd need $1 million. Martin now owns 37 buildings worth about $2 million; they generate enough income to pay for his living expenses and new investments.

Today, Martin is watching his money grow, not shrink; he'd like to amass $10 million and set up a scholarship fund through his church. "And I think in terms of a scholarship for future generations of my family, my nieces and nephews," he says, "so they can have an education and be able to invest in their future."

--Retiree benefits. If you're set to receive a traditional pension, you probably know that your payouts are likely to be based on your three to five peak earning years. Ask your benefits department to compute how much you stand to lose by retiring early, and be sure you're comfortable with the numbers.

Withdrawals from 401(k)s and IRAs before age 59 1/2 generally incur a 10% penalty as well as income taxes. If you're planning on, say, taking a lump-sum distribution from your 403(b) and investing the funds in an IRA, make sure you understand the withdrawal rules.

And as we noted above, if you take Social Security payouts before reaching your full retirement age, your benefits will be lower. Do the numbers to determine whether you can afford to wait until your FRA to begin drawing benefits--and whether you'd be better off.

--Health care. When you walk away from commutes and long hours, you'll probably say good-bye to employer-sponsored health insurance. And even if you're allowed to participate in your former employer's plan, it will cost you. Last year 42% of eligible retirees paid the total tab for these premiums, up from 31% in 1997.

"I tell people, 'If you're going to retire early, budget for health insurance,'" says Dee Lee, a financial planner in Harvard, Mass.and co-author of Let's Talk Money. She generally advises clients to count on paying as much as $30,000 to $45,000 for medical coverage between ages 55 and 65. --L.H.

Do I need long-term-care insurance?

The numbers sound scary--50% of Americans who reach the age of 85 eventually need long-term care. And it's expensive: The average nursing home costs $50,000 a year. But that doesn't necessarily mean you should buy long-term-care insurance. If you have assets of less than $75,000 to $100,000, say health-care consultants, it's likely that you'll eventually qualify for Medicaid. And if you have more than about $600,000, you're better off investing the money until you need it. If you fall in the middle--and especially if longevity and chronic illness both run in your family--you should at least consider insurance.

And don't delay your decision too long: A policy that costs a 50-year-old $888 a year runs $1,850 for a 65-year-old and $5,880 for a 79-year-old. (This policy would take effect in 20 days and pay $100-a-day nursing-home or $50-a-day at-home benefits for four years, with payouts rising 5% annually.) Though rates can go up, you'll almost always come out ahead if you buy a policy when you're younger. Economics aside, you may not qualify for coverage when you're older.

One warning: Unless you're confident that you can afford the premiums for the long haul, don't sign on. You could waste thousands on a policy that lapses before you need it.

Here's what to look for in a policy:

--A financially strong insurer. You want to buy from a firm that will be around if and when you need to collect benefits. Look for an "exceptional" Aaa or "excellent" Aa from Moody's (www.moodys.com), a superior A++ or A+ grade from A.M. Best (www.ambest.com) or between an A+ and B+ from Weiss Ratings (800-289-9222). For $49, Weiss sells customized reports for all long-term-care insurers in your area.

--An inflation rider. If you're under 70, you're probably not going to need the benefits for years, so you should buy a policy that keeps pace with inflation. But it will cost you approximately $500 to $1,000 more a year.

--Ways to trim your premium. The elimination period, which generally runs from zero to 180 days, is the time it takes for your benefits to kick in. The longer you can wait, the less expensive the policy. You can also save by limiting the length of coverage. Three to five years is usually adequate; the average nursing-home stay is 2 1/2 years, and 90% of patients stay less than four.

--Cost and breadth of coverage. Be sure to canvass nursing homes, assisted-living facilities and at-home nursing providers in your area to determine costs. Your state Office on Aging can help you track down estimates. Compare those numbers with the benefits of policies that you can afford. Be sure that home care and assisted living are covered as well as nursing-home fees.

--Tax deductibility. So-called qualified policies let you deduct part of your premium from your federal taxes if your medical costs exceed 7.5% of your adjusted gross income (AGI), but benefits are generally limited. Unless you're sure you'll meet the AGI limits and think you're likely to suffer from a protracted and debilitating illness, choose a nonqualified policy. --L.H.

Should I buy a second home now to live in when I retire?

Len and Violet Burton realized their retirement dream in April: Now in their fifties, they've quit their jobs--he worked for Boeing, she for a swimsuit manufacturer--to sell paintings and photographs. Moving from Fountain Valley, Calif. to their vacation home on the Oregon coast helped them make the math work. They sold their primary house for $298,000, netting $108,000, and plowed the proceeds into their new place, leaving them with a minuscule $6,000 mortgage and much, much lower expenses. "In L.A., all your money is wrapped up in your house," says Len. "This house is twice the size and costs half as much."

Before you decide to follow the Burtons' example, ask yourself if you're sure you want to live in your favorite vacation spot year round. Be realistic about how much space you need; a cozy condo that's great for weekends may feel claustrophobic full time. And make sure the community offers the amenities you want, including quality medical facilities.

If you're still far from retirement, don't buy a property halfway across the country on impulse. "I frankly think it is a dumb idea," says financial planner Malcolm Makin. In five or 10 years, he points out, your life could change; so too could the area you like so much today. And in the meantime, you've tied up your money in a potentially volatile and illiquid property.

On the other hand, buying a second home within about 300 miles of where you live, one that you will actually use for vacations, could be a smart move. By the time you retire, you'll know whether you want to live in the area.

Once you're entering retirement, relocating far from home can make sense. (For our top 10 suggestions, see page 98.) Consider retired schoolteachers Michael Hathaway, 63, and Lois Morgan, 55, who decamped from Oregon to Florida. They already knew the area--her parents live nearby--and they now have all the amenities they want, including a boat. They also say they're saving a bundle on mortgage payments and living expenses.

When you're running the numbers, keep in mind the additional cost of year-round upkeep, insurance and real estate taxes. Online calculators like those at HSH Associates (www.hsh.com/calc-howmuch.html) and Homefair.com (www.homefair.com/usr/qualcalcform.html) can help you figure out how much you can afford.

One final piece of advice: If you're buying in a vacation spot, shop off-season. You'll probably get a better deal. --A.F.

How do I make sure I won't outlive my money?

The first rule of making your money last is not to touch your retirement accounts until you have to--either to pay the bills or because the law requires you to do so. The reason? In a word: taxes. The longer you can continue to rack up tax-deferred returns, the better. An added bonus, especially if you're in a high tax bracket, is that sales from your taxable portfolio may count as long-term capital gains, at a 20% tax rate, while retirement plan withdrawals are taxed as ordinary income, at rates up to 39.6%. Ed and Pat Finn, retired academics in Chevy Chase, Md., figured this one out right. The couple, both 70, have accumulated $2 million-plus in their TIAA-CREF retirement accounts, but they've also got some $400,000 in Exxon Mobil stock, an inheritance from Ed's father, who had long worked at the oil giant's predecessor, Esso.

"My financial manager is after me all the time to get rid of it," says Ed Finn, a former physics professor at Georgetown University, "so that's what we are doing." Not only is the Exxon stock in a taxable account, but it also makes up a disproportionate amount of the Finns' overall portfolio. By selling shares, they've been able to improve their asset allocation while pulling out money for travel and giving $10,000 a year to each of their four grown children.

An even bigger issue than minimizing taxes is figuring out how much money you can withdraw from your portfolio each year without running out of cash. Once you decide how much you need to cover expenses--and to what extent a pension, Social Security or part-time work can fill the gap--you need to come up with a withdrawal strategy that doesn't deplete your account too quickly.

T. Rowe Price retirement specialist Joseph Healy warns that many retirees are too optimistic when they think they can withdraw 8% or more from their portfolios each year. Part of the problem is inflation. The other, he believes, is basing plans on average returns and ignoring the sequence of annual returns. If a bear market occurs soon after you start taking withdrawals, you could run out of money much faster than you expected. According to T. Rowe Price calculations, a balanced portfolio of 60% stocks, 30% bonds and 10% cash earned an average annual return of 11.7% from 1969 to 1999. But an investor who began tapping a retirement account at a rate of 8.5% a year in 1969 would have been broke in less than 13 years because of the vicious bear market in 1973 and 1974. "You really luck out if you have a bull market in the early part of your retirement," Healy says. "But what do you do if you don't?"

The best policy is to keep withdrawals to between 3% and 5% during the first year, and then adjust for inflation. If a withdrawal rate of 5% sounds too low--on a $500,000 portfolio, it amounts to just $1,500 a month after taxes if you're in the 28% tax bracket--consider taking a part-time job after you've retired. Or postpone retirement and keep stashing money in your retirement accounts. Even a short delay can mean a substantial increase in your retirement savings. If you're making $90,000 and contributing 10% to your 401(k), with a 5% match and a 5% return, a $500,000 portfolio would be worth $580,734 in two more years. And that means your 5% withdrawal rate would give you an extra $242 a month after taxes. (You may also want to annuitize some of your funds; see page 79.) --A.F.

How should I tap my retirement accounts?

By law, you must start drawing down your 401(k)s and IRAs the April after you turn 70 1/2. (If you have a Roth, of course, you never have to tap the account.) Remembering that odd date is the easy part. What's hard is working your way through the Internal Revenue Service rules for calculating withdrawals and figuring out which method is the best one for you. "You need to make an affirmative and irrevocable decision about how you will calculate what comes out," says Jack Brod, who heads Vanguard's personal-finance group. That decision will affect not only you but potentially your heirs as well.

The Finns, who have yet to touch their retirement accounts, have begun thinking about what they'll do next spring when their Big Cash-Out must begin. They're lucky: Ed Finn says the couple, who have no debt on their house and receive $2,600 a month from Social Security, don't need the money for living expenses and intend to put the after-tax proceeds of their withdrawals into trust funds for their children. But they're still trying to work through the complicated withdrawal rules.

In the simplest terms, your minimum distributions equal your retirement plan balance divided by your life expectancy. But it's not that easy. First you must decide how you will calculate life expectancy. You can use your own life expectancy, a combination of yours and your spouse's or a combination of yours and a non-spouse beneficiary's. If you want to minimize your distributions, combine your life expectancy with a younger person's.

Second, you must choose one of two distribution methods: term certain, which is based on your life expectancy (or combined expectancies) as it stood when you first took withdrawals; and recalculation, which resets your life expectancy each year. With term certain, your cash will run out when you reach your life expectancy. With recalculation, your distributions will last as long as you do, but they'll be smaller than they would be with term certain.

If you're worried about outliving your money, you should generally choose recalculation. That method is also best if you want to keep the money in your account growing tax-free as long as possible. But if providing for your heirs is a primary goal, consider term certain. In that case, if you die before the end of your projected life span, your beneficiary can keep taking distributions based on your original schedule rather than at the faster pace required by recalculation. --A.F.

ADDITIONAL REPORTING FOR THE RETIREMENT GUIDE BY JUDY FELDMAN AND ROBERTA KIRWAN