Recipe for a rich retirement.

WHEN YOU THINK OF RETIREMENT, you probably half-close your eyes, sit back in your chair and dream a little. Maybe you see yourself sleeping late, then strolling down a Paris boulevard, stopping in the boutiques and galleries before winding down at a favorite sidewalk cafe. Or perhaps you think you'll be an early riser, steering your cabin cruiser out to deep waters where you'll do battle with a wity marlin.

Now, open your eyes and face reality. Whatever your retirement dream, it's probably going to take money--more money than you realize. By facing these realities today, you can be prepared for tomorrow, when you make the fateful switch from "worker" to "retiree."

The first reality you must recognize is that your retirement may last much longer than you expect. Although 65 is the "normal" retirement age, many executives, professionals, and business owners call it quits at 62, 60 or even earlier. In fact, if you work for a large organization intent on "downsizing," you may find yourself involuntarily retired in your early to mid-50s.

That's what happened to Barbara McKnight, a veteran of nearly 40 years at the Bell system. After working her way up to a position as a facility supervisor, she received an early retirement buy-out package from Bell Atlantic in 1991, at 57. "After six weeks of retirement, I decided I wasn't ready yet," says McKnight, who went back to work at the University of Pennsylvania in a clerical position. "Since then, I've been promoted to management," says McKnight, now 60, "so I plan to stay here for several more years. The academic world is a lot less stressful than the corporate world was."

Even if McKnight waits until she's in her mids 60to really retire, she can expect to live another 20 years, according to IRS tables. And that's just the average--her retirement might be even longer. "People tend to underestimate how long they'll need their money," says Bruce Temkin, a retirement specialist with Louis Kravitz & Associates, an employee benefits conslating firm in Encino, Calif. "The joint life expectancy of a retired couple in good health is age 90. When you plan for retirement, you really should be thinking in terms of 25 or 30 years." For many people, retirement will last nearly as long as their working careers!

That can be an extremely long time to go without a paycheck. Therefore, the first step in planning a long, comfortable retirement is to get a realistic estimate of what your retirement income might be. When you make these projections, err on the side of conservatism: When it comes to your retirement, safe beats sorry by a wide margin.

Despite the scare stories that surface from time to time, your retirement income will include Social Security benefits. That's the good news. On the flip side, Social Security benefits won't keep you in champagne and caviar. They're nice to receive, but far from lavish.

You're entitled to a "full benefit" from Social Security if you retire at 65. If you've had the maximum amount of wages withheld for Social Security taxes most of your career and retire this year at 65, you can expect to receive a benefit of about $1,200 per month, or $14,400 per year. If you've been earning less, you can expect a correspondingly lower benefit. Each year, benefits go up a bit, matching increases in the cost of living.

Rather than waiting until 65, you can receive Social Security retirement benefits as early as 62, at your election. The catch? You get a reduced benefit that's locked in for the rest of your life. If you retire on your 62nd birthday, for example, you'd receive an 80% benefit; that is, if you'd be entitled to a $1,000 monthly benefit at age 65, you'd get $800 instead. Then, if the Social Security cost-of-living adjustment is 3% the next year, you'd get a $24 raise instead of $30. And so on, year after year.

Each month you delay your retirement after you reach 62, you get a slightly higher monthly benefit. In fact, if you wait to start benefits until after 65, you'll get a bonus, pushing your monthly check still higher. So when is the best time to begin collecting Social Security? "If you're really ready to retire, start collecting benefits at age 62," says Charles Auerbach of Jaffe Auerbach, a financial planning firm in Memphis. "If you wait until 65, it will take you about 12 years to catch up to the three years of extra benefits you receive from 62 to 65." However, if you plan to do substantial part-time or freelance work, you may be better off waiting until 65, or even later. Earned income may reduce your Social Security benefits.

This is by no means the end of the Social Security story. Married couples likely will be entitled to two checks, whether or not both spouses had careers. Divorced and widowed spouses may be entitled to benefits as well. (Call the Social Security Administration at 800-772-1213 for a Request for Earnings and Benefit Estimate Statement, which will give you an idea of what your family's benefits will be.

Even the most generous Social Security benefits, though, will be much lower than what you were earning, so you'll need more income for a comfortable retirement. Where will that money come from? If you worked many years for a large employer, you may be entitled to a pension.

Increasingly, though, employer pensions are becoming the exception rather than the rule. More often than not, it will be up to you to finance most of your retirement. You might, for example, have built up money in a 401 (k) account or you might have money in an employer's qualified plan that you'll roll over into an IRA. Maybe you'll inherit money; maybe you'll sell the business you've built up over the years. McKnight, for example, had both an 401 (k) account and a buyout package from Bell Atlantic when she made her first try at retirement in 1991. "After taking out some money to pay off credit card debt and paying taxes on those withdrawals, I wound up with around $400,000 altogether," she says.

Now, $400,000 sounds like a decent amount to retire on. Invested in top-rated municipal bonds, McKnight might earn $20,000 to $24,000 per year at 5% to 6%, without owing income tax. Added to her Social Security, that seems like an ample income.

However, bond interest is fixed. The $20,000 you receive in 1995 will have only $10,000 worth of buying power in the year 2013, assuming a 4% annual rate of inflation. If inflation is higher, as it was in the '70s and early '80s, your purchasing power will erode even more rapidly. "To help you understand how inflation can crimp your buying power, think of a meal at McDonald's," explains Greg Costa, an independent financial planner in White Plains, N.Y., who's affiliated with Nadian Lewis Securities. "Not that long ago, you'd get change back from a dollar. Now you're lucky to get change from a five-dollar bill."

To protect against this loss of buying power, most financial advisors recommend a mix of stocks and bonds in your portfolio, for growth as well as income. "Stocks have outperformed bonds in most time periods, and they likely will continue to do so," says Mark E. Balasa, a principal at Burton Investment Management, Schaumburg, Ill. "Clients in their mid- to late 60s might split their portfolios evenly between stocks and bonds," he says. "Using no-load mutual funds, you'd probably want to emphasize those funds investing in large and medium-sized domestic companies. Small-company stocks and international issues tend to have greater price fluctuations and retirees generally prefer less volatility in their portfolios."

With a portfolio divided between stocks and bonds, you'll have to make some hard decisions as a retiree. Should you take all the bond interest and stock dividends your portfolio generates and spend them to provide current income? Should you reinvest those distributions so you'll build up a larger nest egg for your 80s and 90s? Or should you tap your principal by selling some investments each year, supporting your present lifestyle at the possible expense of future needs?

"Most individuals aren't equipped to make those decisions themselves," says McKnight. "You probably shouldn't rely on advice from family members, either. My two grown sons are in the financial field but they decided I'd be better off working with an outside expert." One son introduced her to Costa, who became her financial planner. "He's really helped me get my life in order," says McKnight. As Costa puts it, "She was eating into her nest egg, spending more than she could afford. I gave her some advice on keeping to a budget, in addition to some portfolio restructuring designed to provide greater long-term growth." Thus, working with a financial pro can help you determine how much of your investment principal and income you can spend each year and how much should stay invested.

Once you have a handle on what you can comfortably spend each year from your portfolio, you can add that to your other projected income to get an idea of what you'll be able to spend in retirement. Now you need to forecast retirement expenses as well. To paraphrase Dickens, an income of 20 pence with outlays of 19 pence is bliss, but a 19-pence income with expenses of 20 pence is disaster.

Go over your checkbook and your credit card statements to find out where you really spend your money each year. What expenses are likely to be reduced in retirement? Commuting costs, certainly, and perhaps some industry publications, business-related travel and entertaining, even your clothing outlays. "You're not required to wear the same types of outfits when you're not going to an office every day," says McKnight. On the other hand, you might be spending more on dining out, leisure travel and recreational pursuits.

If your projected income comfortably exceeds your projected costs, fine. You're ready to hit the golf course. But if there's a projected shortfall, some adjustments have to be made.

One way to handle a shortfall is to increase your income. Do you have sizable assets--a second home, perhaps--that you can sell and then reinvest the proceeds? Another option is to postpone retirement or find a part-time job. "This year, semi-retirees ages 65 to 69 can earn up to $11,280 before they start to lose Social Security benefits," says Nancy Levitin, an attorney in private practice in Great Neck, N.Y. "At ages 62 to 65, the upper limit is $8,160 in 1995. Those numbers increase each year to reflect inflation. What's more, after you reach 70 you can earn unlimited amounts and still collect all your Social Security benefits."

"If you can't or would rather not increase your income, some adjustments have to be made on the spending side. "I like the low-stress atmosphere in my new job but I'm only making around $30,000 now," says McKnight. "I can't spend the way I was spending when I was earning $60,000. Therefore, I've cut way down on my use of credit cards. There's no more running to the mall and buying something when-ever I feel a little down."

One decision that may be crucial to your retirement lifestyle is your choice of a home. Naturally, you'll want to live in an area where you'll have easy access to the things you like to do. Moreover, tapping your home equity may be the easiest way to bridge a gap between projected retirement income and expenses.

You can tap that equity by selling your house. If you've enjoyed substantial appreciation, you'll also owe substantial taxes. However, homeowners age 55 and older are entitled to a once-in-a-lifetime $125,000 capital gains exclusion. That is, if you sell your home and realize a $200,000 gain, you'd owe tax only on $75,000. (What's more, legislation now pending in Washington may reduce the tax on capital gains.) That means you'll have more after-tax proceeds to reinvest.

Of course, if you sell your home you'll have to live somewhere in retirement. Moving into a smaller home or a rental apartment may cut your costs as well as trim the time you spend on home maintenance and repairs. You can also cut your retirement expenses by moving to a more affordable region of the country (the South and Midwest tend to be less expensive than the Coasts) or from a major metro area to a small town.

However, don't move to an area just because of lower costs--you have to live there, after all. Instead, evaluate your prospective new home carefully. Take a vacation there, or just a long weekend, to see what it's really like. Do the residents seem like the kinds of people with whom you'd like to spend your retirement years? Will you be able to indulge yourself in your chosen pastimes? If you're an avid golfer, for example, don't move to a town with one ragged course and snow on the ground eight months a year, no matter how low the living costs may be.

Indeed, most retirees scan the country (even the world) and wind up staying put, reports the American Association of Retired Persons (AARP). You, too, may prefer to remain in your hometown, near family, friends and familiar faces. "I plan to stay where I am, in my home in Sharon Hill [Pa.]," says McKnight. "I'm a great sports fan and I go to many of the football and basketball games in Philadelphia." However, she concedes that she might move to a retirement community when she's in her 70s, to reduce the time spent working around the house.

Fortunately there are some creative ways to stay in your own home and still tap your home equity for increased income. If you have a home equity line in place, you can borrow against your house. True, the loan interest must be repaid each month, but those interest payments will likely be tax-deductible. If you'd rather not make monthly interest payments, ask local lenders about

If you're at least reverse mortgages. 62 years old with a house that's fully or nearly paid off, you may be eligible. In many cases, the bank sends you a stream of monthly payments, each of which is effectively a loan against your home. Typically, the interest piles up so you don't have to pay. When you move out of the house or when you die, the outstanding loan balance will be paid out of the sale proceeds. How much can you receive? The shorter the life expectancy and the more home equity you have, the larger your monthly check. A 75-year-old woman with $200,000 in home equity, for example, might receive $300 and up per month, depending on what she needs. Because reverse mortgage payments are loans you're taking out, no income tax is due. For a free list of reverse mortgage lenders and the publication Homemade Money, write to AARP Fulfillment, 601 E Street NW, Washington, DC 20049.

Another housing strategy to consider is buying a two-family house, or duplex. You can live in one half while renting out the other for extra retirement income. Duplexes may make a lot of sense in college towns, where housing demand is always strong. If you have a reliable tenant, he or she can keep an eye on the property when you travel, a prime goal for many retirees.

Stretching your income in these ways can allow you to enjoy the kind of retirement about which you've always dreamed. However, you need to be healthy to get the most out of your retirement, so don't retire from taking care of yourself when you retire from work. Exercise regularly, eat and drink in moderation, and get annual checkups. Perhaps just as important, find yourself a sideline business or a hobby or some volunteer work to exercise your mind, keeping it fit for a retirement that could stretch well into the next century.

Not everyone, though, will be blessed with magnificent health in retirement. In fact, as you get older you're likely to spend more time in doctors' offices than on the squash courts. Medical treatment can be incredibly expensive, so you need proper insurance to keep your wealth intact.

You'll be eligible for Medicare once you reach 65. Until then, you need to provide your own coverage. "Your former employer may offer you health insurance," says Memphis financial planner Auerbach. "If not, check carefully into all available options, including local HMOs that get good marks from friends and associates."

After you cross the Medicare line, your exposure is reduced but not eliminated altogether--a lengthy hospital stay could cost you tens of thousands of dollars. Therefore, you probably should have Medicare supplement ("Medigap") insurance. This coverage is offered by private insurers but under federal law they must sell identical policies. The least expensive coverage ("Plan A") sells for anywhere from $440 per year in Iowa to $746 per year in Florida, according to Weiss Ratings Inc., quoting premiums for a policy bought by a 65-year-old male. Plan A will likely be sufficient to protect you, especially if you use doctors who participate in Medicare, accepting the federal fee schedule.

Neither Medicare nor Medigap, however, will cover one potential disaster--long stays in nursing homes. If you are in a nursing home not for acute medical reasons but merely to have someone take care of you, you'll have to pay the bills yourself--bills that may begin at $40,000 to 50,000 a year. Again, long-term care insurance is available; the younger you are when you buy, the lower the annual premium you'll lock in. Make sure your policy will cover custodial care in any institution if you can't perform the "activities of daily living."

Buying health care insurance probably wasn't what you had in mind for your retirement dream. However, if you protect your assets with solid policies from sound insurers, you'll have the peace of mind of knowing that your golden years won't suddenly turn leaden.