Retirement requires investors to ask a whole new set of questions. We have the answers.

TWO WEEKS INTO retirement, Steve Furste of Zionsville, Ind., started looking for work. Like many recent retirees, the 59-year-old former manager of community affairs and charitable contributions for Dow AgroSciences, who retired in July 2004, is somewhat daunted by the task of stretching his nest egg for decades to come.

It's not that Furste is in dire financial straits. Quite the contrary. After 25 years in corporate America, he has all the goodies: a defined-benefit pension plan, a 401(k), generous health care benefits and the guidance of a well-respected financial planner. Moreover, his wife, Becky, 60, owns her own residential realty company, and most likely will continue working for the next five years.

So why is Furste so determined to keep the paychecks coming? Call it the comfort factor. "In the back of my mind," he says, "I guess there's always a little bit of anxiety that, 'Boy, I haven't saved enough.' I think we all go through that." Furste will rest easier knowing that he's addressing his uncertainty head on. He hopes to work part time as a consultant in the field of corporate philanthropy for the next few years, while devoting more time to his favorite sport: running. "The luxury at my age is that you have choices," he says.

But with choices come responsibilities. "We feel both excitement and anxiety at the prospect that we might live a lot longer than our parents," says Walt Woerheide, vice president and professor of investments at the American College, a Bryn Mawr, Pa., nonprofit that trains financial planners. That's why the very concept of retirement is changing, for Furste and the rest of America's fiftysomethings.

"Retirement is a word that we strongly think needs to be retired," says Harold Evensky, chairman of Evensky, Brown & Katz, a financial-planning firm in Coral Gables, Fla. "People simply aren't going to retire. They're going to readjust their lifestyle." Consider that a recent survey by the AARP found that 68% of working people over the age of 50 said they expect to work for pay after they retire from their current careers. And 53% of those surveyed, or more than three-quarters of the folks who said they expected to keep working, said that "working for enjoyment, not for money," fit their "personal definition of retirement."

Of course, there are plenty of folks who want to retire and never work another day in their lives. But no matter what your definition of retirement, there are a few essentials that you'll need to master if your portfolio is to weather the stock market's periodic storms and leave you with enough cash to keep you sitting pretty until you're at least 95. You can start by asking yourself three key questions: How much money do I need? Where will the money come from? And how should I invest to make it last? And after you've come up with those answers, be sure to try out the worksheet provided to us by Morningstar.com to see if you're on the right path.

How Much Do You Need?
Regardless of your goal — traveling the globe or spending time with your grandkids — your first task should be to get a handle on how much your ideal retirement will cost. Many financial planners use ballpark figures, such as 80% to 100% of your pre-retirement income, adjusted for inflation. That would be quite an ostrich-size nest egg.

But before you start bulk-ordering mac 'n' cheese, know that many experts say retirees can live quite comfortably on far less. In fact, you're probably already doing so. Right now, for example, a significant slice of your paycheck might be going straight into retirement savings, reducing your take-home pay by perhaps 10%. And on the expense side, you might be on the cusp of paying off your mortgage, or planning to downsize your home or move to a lower-cost area-all endeavors that would cut your monthly nut.

For what it's worth, some retirees also swear that managing expenses is far easier after retirement than it was beforehand. Marita Grashof, 72, of Coatesville, Pa., is among them. With her kids grown up — Grashof has three children from a previous marriage, while her husband has four — and the house paid off, Grashof enjoys her reduced responsibilities. "We live modestly, but we do what we want to do," she says. "There's no more of that keep-up-with-the-Joneses attitude."

For some help in crunching your retirement-expense numbers, see the AARP's budget worksheet. Click on the area that says "Evaluate Your Cash Flow."

Where's the Money Coming From?
Chances are, you'll fund your retirement through various income streams and your investment portfolio, including your 401(k) and IRA. How much you need to lean on that portfolio depends on how much other cash is coming in each month. So add it up.

Defined-Benefit Pension Plans. Approximately 20% of American workers at private companies (and many government workers) are covered by these traditional pension plans, according to the Department of Labor's latest figures. Defined-benefit plans offer regular payments throughout retirement. If you fall into this camp — and you've worked at your company for many years — chances are this will represent a big chunk of your retirement income. Be sure to ask how much your benefit would increase if you were to work an extra year or two.

Social Security. Looming shortfalls in coming decades have prompted Federal Reserve Chairman Alan Greenspan and others in recent years to call for benefit reductions, means testing or both. For now, however, the system remains solvent, and there's nothing happening on the political stump to indicate that any change is imminent for Americans who are nearing or in retirement. In 2005 partial benefits begin at age 62, while full benefits — at a maximum of $23,268 per person, per year, adjusted annually for inflation — are available to those at or above age 65 and six months. And for each year beyond that you wait to begin collecting Social Security, your benefit increases by up to 8% until age 70. If, however, you tap Social Security as soon as you're eligible, at age 62, your benefit will be reduced by 22%. You can request a Social Security estimate via the Social Security Administration's Web site.

Part-Time Work. More than two-thirds of pre-retirees plan to work during retirement, according to the AARP's 2003 Working in Retirement survey. Some will take on consulting work, others will begin new, less ambitious careers, and still others will turn to the most vibrant part of our economy: small businesses. But you should be realistic as to how much you expect to earn. "One of my early lessons," says recent retiree Frank Lauricella of New City, N.Y., "was that the pay scale in corporate America is so much greater than it is in small businesses."

Tapping Your Investment Portfolio
The difference between your projected expenses and your existing income streams must be made up by your investment portfolio, which can include taxable accounts as well as tax-advantaged retirement accounts, like 401(k)s, 403(b)s and IRAs. The two main questions: How to invest that portfolio? And at what rate can you afford to take withdrawals?

Asset Allocation. Young retirees need a combination of stocks, bonds and a small cash-based emergency fund. Evensky recommends a ballpark starting allocation of 60% stocks and 40% bonds. From there, tweak the distribution to reflect your economic outlook, risk tolerance, estate-planning goals and overall health, among other things. For some assistance, visit SmartMoney.com's Asset Allocator for Retirees.

Diversify, Diversify, Diversify. With equities, that means holding a mixture of mutual funds made up of large- and small-cap stocks, international stocks and real-estate investment trusts. "By adding categories that are more volatile to the mix, you actually get a less volatile portfolio, because not everything goes up and down at the same time, to the same degree," says planner Jonathan T. Guyton, a principal at Cornerstone Wealth Advisors in Edina, Minn.

As for bonds, investors with larger portfolios might want to set up what's known as a ladder to reduce interest-rate risk. This involves purchasing a series of bonds in varying durations from short to long term, with the average duration typically falling somewhere in the middle. Investors with smaller portfolios might want to go with bond mutual funds. Either way, says Evensky, investors should favor bonds with shorter durations, given the likelihood that interest rates will rise from here.

Cashing In. Next question: How much can you safely withdraw from your portfolio each year? Many retirees start by initially withdrawing 4% to 6% of their portfolio's value, and then tinkering with that percentage each year thereafter. Obviously, everyone's different.

You should think strategically, too, about which type of account you decide to tap first, says certified public accountant Martin Nissenbaum, national director of retirement planning at Ernst & Young. Generally speaking, IRAs and 401(k)s should be left intact for as long as possible so that you can take full advantage of the tax-deferred growth. And make sure you always factor in the tax treatment of withdrawals from various accounts. One note: Mandatory withdrawals are required from traditional IRAs in the year after you reach age 70 1/2.

Putting It All Together
Take a trip to Monte Carlo. No, not the Mediterranean gambling destination. Many financial planners use a technique known as Monte Carlo simulation to estimate the statistical likelihood that a portfolio will survive for the long haul.

This is pretty complicated stuff, but at its core are mathematical models that try to predict the effects of various return scenarios on a portfolio. Traditional retirement projections are often made using a flat average annual return of, say, 10% for equities. By contrast, projections that use Monte Carlo generate varied annual return figures and rerun the projections hundreds or even thousands of times to calculate statistical likelihoods. The worksheet included in this story, which was created by the folks at Morningstar.com, incorporates Monte Carlo to help you determine just how much you can spend during retirement.

You can also get a taste of Monte Carlo online. T. Rowe Price, for example, offers a free Monte Carlo-based Retirement Income Calculator. And earlier this year, Fidelity Investments rolled out a more elaborate Retirement Income Planner tool. In addition to looking at your investment portfolio, the Fidelity calculator takes an all-encompassing view of your retirement, factoring in specific expenses, income streams and the finances of your spouse. The tool is available free to Fidelity account holders.

Sexy Supermodels. A note of caution: When using modeling software, keep in mind that results are only as good as the assumptions made — and they can vary widely from one tool to the next. "The Monte Carlo charts are pretty to look at, (but) there's an illusion of accuracy that's not there," says Woerheide.

On the other hand, when fiddling around with these types of projections, don't feel as if you need to create a 100% likelihood that you'll never run out of money. "That means from now until the year you die, everything could be a disaster and you'd still be OK," says Sue Stevens, director of financial planning at Morningstar and president of Stevens Portfolio Design. "That may be overkill." She suggests settling on a likelihood in the range of 75% to 95%.

Golden Years? No, Really, They Are
With so much to think about, it's easy to forget that a comfortable retirement is about much more than just statistics and projections.

"A lot of (retirement) is what you make of it and your attitude" says 72-year-old Marita Grashof, who retired six years ago but still works part time as a registered nurse. "Are you going to sit on your duff, or are you going to get out there and do something?"

That something — in Grashof's case, it's performing a satisfying job that keeps her two stabled horses deep in oats — is the key to making retirement a success. "I think this is the happiest time in my life," she says.