(MONEY Magazine) – Retirement. It's a daydream that for many of us involves visions of 10 a.m. tee times, 3 p.m. naps and 6 p.m. mojitos by the pool. Or maybe of teaching a course at the local college, learning to fly or moving to the mountains of Oaxaca, Mexico. Thanks to the strong economy and remarkable bull market of the 1990s, that dream has in recent years seemed within reach for many Americans. According to a survey taken in 2000 by the Employee Benefit Research Institute, 26% of the respondents said they were confident that they'd have enough money to live comfortably in retirement, up from just 19% in 1993.

Today, with the major stock indexes down and the economy slowing, the ideal retirement may seem harder to achieve. That need not be the case.

On the following pages, we'll help you plan for a prosperous future, whether you're just starting out or in your nifty fifties ("A Plan for Every Stage," page 81). We'll discuss the role of funds in your retirement portfolio--but we'll also make a strong case for including stocks in your tax-deferred accounts ("Stocks to Count On," page 88). We'll even redefine the parameters of retirement in an age when centenarians are the fastest-growing segment of our population ("Are You Ready for 100?," page 98).

Some of our advice may seem familiar to dedicated retirement savers--it was smart to max out your 401(k) contributions in 1980, it was smart in 1990 and still is today. But when that goal of a comfortable retirement, or a luxurious one, suddenly seems more difficult to attain, we think it's time to come up with strategies that can give your retirement saving some extra sizzle.

To find those strategies, we talked to people who have retired early or have mapped out specific plans to do so. Their stories and suggestions, detailed on these pages, were varied, and not all conformed to convention. Some of our early retirees are unlocking the value of one of their biggest assets--their house. Others have found a way to make early withdrawals from their 401(k)s without penalty. Still others are converting cash-value insurance or even joining the Peace Corps.

In all cases, though, we were struck by one common theme: the need for trade-offs. No matter how much money you have, no matter how carefully you plan, no matter whether the stock market is up or down, you'll no doubt have to make compromises.

And those trade-offs may not always be financial. "It's not just about the money," says John F. Wasik, author of Retire Early and The Late-Start Investor. "You have to factor in the possibility of doing something different."

Which is exactly what Miami-Dade County police officer Bruce Dyson and his wife Myra are doing (see the photo, opposite). Dyson bought a universal life insurance policy to protect his family. Now that policy has become a retirement asset: Dyson, 42, intends to use the policy's cash value to help him leave the force before he's 50.

There's no one formula for navigating this road to retirement. It can be exciting and thrilling, yet also scary and even wrenching. The good news is that, used together, the strategies and steps detailed in this package can help you prepare for the kind of retirement that's just right for you.

Consider Gary Dunn. At 37 he retired as a vice president at Scudder Investments on the very day he vested in his profit-sharing plan. Dunn was by no means a millionaire--he and wife Thea had about $350,000 in savings--but "I just wanted out of the rat race," he says. The couple sold their home in Connecticut, took their three children and spent a year as volunteer schoolteachers in India and Africa.

When they returned, the Dunns decided to skip corporate careers and the expensive suburban lifestyle. They settled in Carefree, Ariz., where they publish the Caretaker Gazette, a newsletter that helps other couples retire early by matching them with house-sitting openings worldwide. "We do what we do because we want to," says Dunn, now 46. "Isn't that what life's all about?"

TAP INTO YOUR 401(K) OR IRA

When he was 53, Clark Hammeal was faced with a very big decision: Take a buy-out from the South Florida power company where he'd toiled for 28 years, or take on more responsibility there. For Hammeal, a laid-back type who loves golfing and gourmet cooking, the answer was absolutely clear: He wanted out. But there was a caveat. He didn't think he could afford to retire until age 59 1/2, when he could finally tap into his 401(k) account without paying a hefty 10% penalty.

Then Hammeal learned about 72(t), a little-known Internal Revenue Service rule that allows early withdrawals from retirement accounts at any age, penalty-free. The 57-year-old Miami resident rolled over his 401(k) into an IRA and is now withdrawing $48,739 a year from the account, now valued at $465,000.

Today, Hammeal spends his days on the golf course, in the kitchen cooking recipes from gourmet magazines and visiting family in Virginia and Iowa. "It's fantastic," he says. "I've had offers to do some consulting, but the more I'm retired, the less I think about working."

Of course, just because you can take money out of your retirement accounts early doesn't mean you should. Remember, the reason you so diligently stuck part of every paycheck in your 401(k) in the first place was to make sure that you're well taken care of when you stop working. You wouldn't want to start living the high life at age 50 only to find that by 75 you've run out of money. Still, if you have sufficient resources, getting access to your 401(k) early can be a boon.

Making a 72(t) plan work for you takes planning. Here's how to go about it. First, you will probably need to convert your 401(k) into a rollover IRA. Most 401(k) plans aren't set up for these distributions. You'll also have to figure out how much money you need to live on. Assess your financial situation with the rigor of a scientist. Analyze your expenses--everything from your mortgage to how much you spend on vacations and clothing. Don't assume that not working will mean spending less. You may well still have a mortgage, and at 50, you're hardly ready for the rocking chair. You may want to travel, maybe take college courses or finally try mountain climbing--all this costs money.

Once you know how much income you need, you'll have to decide which of three IRS formulas you should use to determine your withdrawals. Which one you choose can make a great deal of difference. For a 52-year-old with a $500,000 IRA balance at the end of this year, annual withdrawals could be as little as $15,974 or as much as $38,066.

The simplest method is based on life expectancy. You divide your account balance as of Dec. 31 (of the preceding year) by a life expectancy factor based on your age from IRS Publication 590, Individual Retirement Arrangements (www.irs.gov). Every year, you repeat this calculation. This method provides the smallest withdrawals, allowing the lion's share of your assets to continue growing. Keep in mind, though, that if your investments perform poorly in any given year, the amount you can withdraw the following year may drop significantly.

The other methods, amortization and annuity, let you take a fixed amount--always more than the life expectancy method allows--every year. Both are based on the assumption that your account will continue to earn solid returns. The annuity method allows you to adjust your annual distribution every year for inflation. The calculations are complicated, so we suggest consulting a financial planner. If you want to try it yourself, the Retire Early site at Geocities.com (www.geocities .com/WallStreet/8257/reindex.html) offers lots of information and downloadable calculators. Generally, the annuity method provides the largest payouts. Whichever formula you choose, you must stick with it for a minimum of five years or until you're 59 1/2, whichever is longer.

The hard part of making a 72(t) plan work is striking a balance. If you underestimate what you need, you'll come up short of cash. If your withdrawals are too big, you could jeopardize your future retirement. You could even deplete your account before you reach 59 1/2--which would subject you to a punishing 10% penalty and retroactive interest on the withdrawals you took. A 40-year-old who exhausted a $100,000 IRA before reaching 59 1/2 would get hit for $56,012 in penalties and interest, more than half the original amount of the account, according to calculations at the Retire Early website.

Despite the risks, Hammeal is taking roughly 10% of his retirement account each year. That's a very aggressive number, bigger than his Miami financial planner, Patrick Day, would like. Most people should take no more than 5% to 8% of their balance a year, he says. But Hammeal feels comfortable with his choice because his wife still earns a good salary as a human resources manager and has sizable retirement accounts.

"I didn't want to be short of money. I like to have money in my pocket and be able to get up and go at any time," Hammeal says. After his wife retires, he says, he'll probably shrink his withdrawals significantly.

The amount you can comfortably withdraw from your account hinges on your total financial picture. "It depends on a lot of variables--what other assets you have, whether you're willing to change your lifestyle or not, whether you're flexible to spend less under certain conditions," says Day.

If the numbers don't add up for you, you may be able to reduce your hours to part-time work. Or you can shift to a less lucrative career in a field you've always dreamed of trying and still take advantage of a 72(t).

That's what 51-year-old Bev Holstun did. As a manager for U S West, she put in long hours. But as an avid athlete--she runs, bikes and swims, and has entered local triathlons--she fantasized about a different lifestyle. "I wanted a job where I would actually use my body in a positive way," she says. "I didn't want to have to think about working in terms of making money." In 1999, Holstun retired from U S West to become a yoga instructor in Seattle. She supplements her much lower salary with a 72(t) plan. "It doesn't feel like working," she says.

UNLOCK THE VALUE OF YOUR REAL ESTATE

Seven years ago, Armando Arias never expected his three-bedroom home in Salinas, Calif. to be his ticket to early retirement. Then Silicon Valley happened. Salinas is about a 50-minute drive south of the tech mecca and, as housing prices in the Valley skyrocketed to astronomical heights, tech workers have spread out further and further into nearby towns, looking for (relatively) cheap digs. The result: Even in a modest rural community like Salinas, best known as the birthplace of John Steinbeck, housing prices have more than doubled in the past five years and are still rising an average of 3% a month.

That's good news for Arias. He paid $198,000 for the 1,920-square-foot home he bought when he accepted a post as a dean at nearby California State University at Monterey Bay. Now similar homes in this town are selling for as much as $425,000.

So the 47-year-old academic is thinking of trading his home for a less expensive one that he can buy through a university housing program and investing the difference--which he expects to amount to at least $180,000. Arias would use the dividends generated from his investments to beef up contributions to his university retirement plan.

While most of us save for retirement largely through 401(k)s and IRAs, the fact remains that for many of us our home is our largest asset. Unlocking the value of that asset is one way to help fund retirement at any age. Just how effective it can be for you depends, first, on how much equity you've built up in your house, and second, on what tradeoffs you're willing to make in your standard of living.

There are two basic approaches to capitalizing on the value of your home. Downsizing. Thanks to the nation's red-hot real estate market of recent years, many homeowners have seen their property appreciate as they built significant equity.

Trading your two-story, four-bedroom mini-mansion for, say, a two-bedroom townhouse, will free up capital you can invest to produce an income stream. And as long as you have lived in the house for two of the past five years, you can escape taxes on gains of up to $500,000 for couples filing a joint return ($250,000 for singles).

Moving into a smaller place is also likely to trim your living expenses--fewer windows to have washed, less grass to have mowed, less space to heat and decorate and maintain, not to mention lower property taxes.

"We're seeing a lot more of this kind of thing," says Michael K. McMahan, a Gastonia, N.C. financial planner. "Couples who are still active and independent but don't need the larger home can replace the more expensive and elaborate home with a smaller patio home and invest that extra $100,000 in something that will generate income and growth."

Moving where the cost of living is lower. Arias may pass on the university housing and is considering moving from Salinas to a new university post in Las Vegas, where the cost of living is 19% lower. To compare various cities' living costs, see MONEY's "Best Places to Live" feature on www.money.com, which offers an online calculator as well as information on recreational and cultural activities, medical facilities, population and climate. On www.homestore.com, you can check mortgage rates, find realtors and view home listings nationwide.

But making the numbers work may be the easiest part of this. Selling your home--or even renting it out and moving to a cheaper locale--isn't just a financial decision; it's an emotional one that requires a serious gut check. Are you willing to leave the place where you've raised your children and accumulated years of memorable experiences? Are you ready to change your lifestyle? Will you miss your friends and family? Will your son need a place to stay after graduating from college? Will you need to take in an aging parent?

All of this has caused Arias to rethink where and how he wants to live. The professor finds himself struggling with all kinds of questions: If he were to move somewhere new, how would that affect his youngest son, who has three years of high school left? Also, he's concerned that if he sells now, he could miss out on any further gains in his home's value. On the other hand, if he doesn't sell, an economic slowdown could hurt the real estate market and cut his potential profit.

But he recognizes that he's very lucky: The equity he has in his house gives him choices he would not have had otherwise. "Suddenly, my horizons have expanded," he says. "This has made me think about what I really want and how I get there."

MAKE THE MOST OF YOUR COMPANY'S BUY-OUT

As a math major at Norfolk State University, Betty Waller Gray says, she was so shy "I would have picked myself as least likely to succeed." Still, she had the perseverance to pursue a career in computer sciences--even though in the '60s few women or minorities had cracked the field. In her first job as a programmer at Du Pont, memos instructed workers to wear ties to meetings. She was the only woman in the department. "There'd be stag parties for the guys," she says. "So I just started to show up."

That kind of quiet tenaciousness helped Gray thrive in her job and build a successful career. She stayed on as a computer analyst at Du Pont for 14 years before moving to Philip Morris for another 16. The work paid well--as much as $60,000 a year--but "I was getting ready to try something else," says Gray. By the time Philip Morris dangled an early-retirement package in June 1998, when she was 52, she was prepared to make the jump.

The golden parachute offered by Gray's employer covered her health-care costs until she qualifies for Medicare. It also provided a monthly pension for the rest of her life, determined by years of service. By adding a "bridge" of five years to her length of service, the package allowed Gray to boost the number of years she worked to 21. But because she retired before the age of 55, the company assessed her a penalty of almost 18% on her pension. In all, her monthly check would amount to $1,057.

The penalty almost made her think twice about retiring. "It really hurt," says Gray. "I thought, Would working three more years be so bad? But you get to a point where enough is enough."

"Not everyone who is offered a buyout package can afford to retire," notes Retire Early author Wasik. That's why it's important to fully evaluate any package before you leap. Get as much detail as you can, in writing, about the financial terms of the buy-out. Company offers can range from a one-time lump-sum payment to a pension that provides monthly income. Health insurance is critical; the best company retirement packages cover you until Medicare kicks in. Consider the value to you of fringe benefits you may be offered, such as financial planning, tuition or retraining.

Once the terms are clear, the next step, says Wasik, "is to determine whether your investment and pension income will sustain your lifestyle."

To get a handle on her finances, Gray attended a financial planning session offered by her employer. She then turned for additional advice to a member of her large, close-knit family, LeCount Davis, a certified financial planner in Chevy Chase, Md.

Together they evaluated her expenses. The pension from Philip Morris would cover the $870 mortgage bill on Gray's four-bedroom home in a suburb of Richmond--but not much more. "I'm not an extravagant person," says Gray; she drives a '92 Dodge Caravan, for instance, and keeps an '87 Olds as a spare. But Gray, who is divorced, also helps her 20-year-old daughter with $1,200 a semester in college tuition and $100 a month for her health insurance.

Some expenses will diminish in time: Her daughter will graduate from college in two years, and when that happens Gray plans to sell her house and move in with her twin sister. Plus, her income will increase: Gray, now 54, can look forward to Social Security checks as well as a $400-a-month pension from Du Pont when she turns 65. But in the meantime, Davis' assessment was blunt: "She needed another source of income."

Gray had about $300,000 in her 401(k), plus 300 shares of Philip Morris stock and 500 shares of Du Pont, which together amounted to $48,900 at the time. She considered tapping into her 401(k) without penalty under IRS rule 72(t) (see page 68). But she had invested too conservatively for many years, filling her portfolio with low-interest, guaranteed vehicles. "I don't want to touch the 401(k) until I have to," Gray says. (At Davis' recommendation, she has since moved her holdings into stock and bond mutual funds projected to grow by 8% to 10% a year, to $600,000, by the time Gray reaches 59 1/2.)

The solution to her income problem arrived when her brother asked her to help out at the family business, Waller & Co., a 100-year-old jewelry store in downtown Richmond where her twin sister and two nephews also work. Gray goes in most afternoons, earning $1,200 a month. "I love it," she says. "I get to be with my family." The feeling is mutual. "You can imagine how valuable it is to have a computer expert in the house," says Richard Waller, her brother.

Gray doesn't miss the nine-to-five corporate grind, though she knows she's missing out on a fatter paycheck. "Money isn't everything," she says.

CAPITALIZE ON THE CASH VALUE OF YOUR INSURANCE

Police work is dangerous duty. That's why Bruce Dyson, a motorcycle cop in Miami-Dade County, bulked up on life insurance. To protect his wife, he took out a $300,000 variable-universal life policy, as well as a $250,000 term-life policy. But Dyson, 42, also has other plans for his insurance: That variable-universal policy (VUL) will help him retire early. As early as age 49, Dyson will be eligible to hang up his shield. "Law enforcement is a young person's job," he says. "I don't want to be on the street when I'm in my late fifties or sixties."

Like other cash-value insurance, Dyson's VUL provides both a death benefit and a savings component that grows tax deferred. When he retires, he plans to use the savings to supplement his police pension until other income streams, such as his deferred-compensation plan, are available. In the meantime, his deferred-comp investments will continue growing.

Cash-value insurance is not a product MONEY generally recommends as an investment, and for insurance, term life is a better buy for most people. But if you do own a whole life, universal life or variable-universal life policy, the cash value may have accumulated over the years into a nice little pot of money.

There are three ways you can take advantage of that to get cash for retirement.

Just take the cash. Most insurers allow you to withdraw a portion of your cash value without affecting your death benefit. You pay income taxes only on the withdrawals that exceed the amount paid in as premiums. If you withdraw $100,000 in cash value and you paid $30,000 in premiums, you pay taxes on $70,000.

Borrow against it. Most insurers allow you to borrow against the cash value at a very low interest rate, and defer repayment; at your death, the loan amount is deducted from the death benefit. The advantage here is that you pay no taxes on the loan. The risk of this strategy: If you later cancel the policy, you will have to pay taxes on the amount of the loan that exceeds your premium payments. And before deciding to borrow from your policy, think carefully about how the death-benefit reduction will affect your heirs.

You can also combine the first two methods by withdrawing the amount of your premium payments, then borrowing against the remainder of your cash value.

Convert the policy. If you have other substantial retirement assets and no longer need the insurance, you can cancel the policy and transfer the cash value to an annuity, a tax-free move similar to a 401(k) rollover into an IRA. That's what Dyson plans to do.

Laura Walsh of Weston, Fla., Dyson's financial planner, anticipates that by the time he turns 49, his policy will have a cash value of $150,000. By converting it to an annuity, he'll be able to draw out about $35,000 a year for five years. Plus, he'll save the $3,000 a year he's been spending on premiums.

That income will allow Dyson to enjoy a higher standard of living while he's collecting his $58,000-a-year police pension. And he'll be able to avoid tapping his deferred-compensation plan--now worth $140,000--until he turns 55.

The downside of canceling your policy is that you--or, more precisely, your heirs--lose the death benefit. So before you consider canceling your policy, run the numbers to be sure your family is adequately protected.

Walsh says that converting even small policies may be worthwhile if you no longer need the insurance. "Even if you have $35,000 or $50,000, you can take that cash value and invest it in the market," she says. "That money can buy you an extra year's retirement."

DO THE NUMBERS, THEN TRY SOMETHING CREATIVE

Early retirement often seems to be the reward for an inordinate amount of planning or luck. But sometimes it's the result of a little creative thinking--and an adventurous spirit.

When Sumana Harrison and David McCollam took a meandering trip through Mexico four years ago, they were sick of the grind. McCollam, then 56, had just sold his partnership in a family catering business he'd run for 22 years; Harrison, then 55, was consulting for small businesses. After lolling around for six months south of the border, they returned to San Diego. "We looked at each other and said, 'We don't want to go back to work,'" Harrison recalls. "But to afford to live in California, we knew we'd have to."

The couple had less than $500,000 saved. "I'd always heard you needed a million to retire," says McCollam. "But it was a time in my life when I was questioning a lot of things. Is this what it's all about? What am I going to do with the rest of my life? How do we retire on this much money?"

The answers seemed to lie in Mexico. They knew they could live there for a fraction of the $4,000 a month they spent in San Diego. But it would be a big move--less for Harrison, who is from South Africa and has lived around the world, than for McCollam, a lifelong Californian who would leave behind two children and four grandchildren. (Both Harrison and McCollam are divorced.)

Instead of relocating cold turkey, the couple found an ideal middle step: a housesitting position listed in the Caretaker Gazette (www.caretaker.org) on a 40-acre estate in southern Mexico. They packed up their rental apartment and headed to Oaxaca, where they lived rent-free for a year and a half.

"And then we found this house," says Harrison. The single-story home boasted a sprawling patio, a mango orchard and a price tag of $30,000. They spent another $20,000 putting in tile floors and a new roof, "but other than that, our expenses are mainly food and booze," she says. "We go out all the time because--why not?" Restaurant tabs are about $13. A maid and a gardener visit several times a week. Total monthly expenses amount to $1,200 a month, or $14,400 a year.

Monthly payouts from the sale of McCollam's business cover their bills. The payments will stop about when they'll begin getting Social Security checks, at 62; at that time the couple will also start to draw down their mid-six-figure savings, which are currently invested entirely in stocks and stock mutual funds in a U.S. brokerage account. McCollam figures that, combined with Social Security, will more than cover their simple lifestyle.

Mexico is cheap and idyllic, but Harrison and McCollam accept inconveniences that many American retirees would not. It took over two years to get a phone line, for instance. And there are more serious trade-offs to living in a less developed country: Health care is not at American standards, though it's so inexpensive that the couple have chosen to pay doctors out of pocket and buy only catastrophic health insurance (the total bill: about $600 a year).

"Our experience is either people understand what you're doing or they don't," says Harrison. "It's not just about living cheaply. It takes a certain type of person with an adventurous heart who chooses this lifestyle."

Mirella Shannon was that type of person--though she didn't know it. Two years ago, she was running institutional operations for investment firm Neuberger Berman in New York City. Then one day her college-graduate daughter came home with a Peace Corps application. On a whim, Shannon filled it out herself. Months later, the Peace Corps asked if she wanted to teach computer literacy in Belize.

"I was kind of terrified," she says. "I was 50 and at the top of my profession." But Shannon always dreamed of retiring early: "It was a matter of not so much stopping work, but at some early age having choices of what to do."

Before she took the plunge, Shannon consulted Jonathan Satovsky of American Express Financial Advisors. "She was walking away unvested from all her options in the company stock," he says--not to mention giving up a salary of $450,000 to live on a subsistence-level stipend. Shannon had accumulated over $1 million in savings, $500,000 of it in her 401(k), but by retiring so early she would need her money to last her for many years.

By living off the Peace Corps stipend, though, she wouldn't need to draw down her savings for another two years. And once she deserted her New York career, Shannon no longer needed the city apartment she'd bought for $550,000 five years earlier. (She is separated from her husband, who lives in New Jersey.) She sold it for $835,000 and added the gains to her portfolio; she now has $1.5 million invested in stock mutual funds and bonds. Shannon hasn't decided where to live when she returns, but her adviser says she'll have plenty to live on, including $100,000 for a down payment on a new home.

Financial security didn't prepare Shannon, now 52, for the shock of her new life. Punta Gorda is 12 hours by bus from the nearest metropolis, Belize City. "There's indoor plumbing and electricity but no hot water," she says. Plus, there are the challenges of bringing technology to a poor school system. "If a computer breaks, you don't go down the street to CompUSA. I miss my corner office, the prestige of a big firm." Yet she's never been happier. "I was a driven and stressed-out woman, and I didn't even know it," she says. "I'm much more relaxed. I've made choices I'm proud of."