Fresh Ideas for Retiring Rich

America is on the verge of a retirement revolution. The oldest of the baby-boomers -- the 76 million Americans born between 1946 and 1964 -- are turning 59frac12;, the magic milestone when they can start tapping their retirement accounts penalty-free. In just three more years, the same advance team will be eligible to take early benefits from social security.

But just because they can pack it in doesn't mean that they should. In case you've missed the great national debate, social security alone can't guarantee you a smooth transition to living without a salary.

The stark reality is that to live comfortably in retirement -- whatever that means to you -- you must have your own resources. And given longer life expectancies, your savings may have to last 20 years or more. If you're years away from your retirement party, start planning now. But even if you're nearly ready to give up your parking space, it's not too late to catch up. To get you going, we offer seven approaches to amassing a big bundle, several of which should be new to you. Now that you know what they are, use them to secure your own future.

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Save tax-free

1.Employers now can offer a new retirement-savings account, the Roth 401(k). Like the more-familiar Roth IRA, it provides no up-front tax deduction, so your contributions won't reduce your current taxable income. But all the money you withdraw in retirement -- both contributions and earnings -- is tax-free as long as the funds have been in the account for at least five years and the account owner is at least 59frac12; years old. That means every dime will be yours to spend at a time when you may need the money most, unhampered by taxes that whittle away at most other retirement savings.

The Roth 401(k) offers two big pluses over the Roth IRA: higher contribution ceilings and no income limits. "The Roth IRA is the holy grail of retirement accounts, but we never started one because our income was right on the edge," says Trip Leonard, 34, a stay-at-home dad and self-described personal-finance geek who hosts his own Internet blog on the subject (visit www.musingmoney.com). "I don't mind paying taxes now if it means tax-free income in retirement."

Workers are barred from contributing to a Roth IRA once their income tops $110,000 for individuals and $160,000 for married couples. But, for the first time, high earners will be able to take advantage of tax-free retirement savings because the Roth 401(k) has no income limits -- although anti-discrimination rules that sometimes limit contributions to 401(k) accounts by highly compensated employees (those who earn $95,000 a year or more) will apply.

The maximum a worker can contribute to a Roth 401(k) is $15,000 in 2006; employees 50 and older can put away an additional $5,000. By contrast, the maximum contribution to a Roth IRA is $4,000 and $5,000 for those 50 and older who qualify for "catch-up" contributions.

Although companies are not required to offer Roth 401(k) programs, a recent study by human resources firm Hewitt Associates found that more than one-third of employers are likely to add them. Your employer may offer matching contributions to your Roth 401(k), but they must be held in a separate account because the boss's money and earnings on it will be taxed in retirement.

A Roth 401(k) can also be a great deal for young, lower-paid workers, who reap only small benefits from current tax breaks and are likely to face higher tax rates later. "Younger workers will have more years in the workforce and more years to accumulate tax-free dollars," says Lynn Foust, an employee-benefits specialist with Baker Boyer National Bank, in Walla Walla, Wash. Her advice: "Save as much as you can, as early as you can, and let compounding work its magic."

For example, a 30-year-old who contributes $10,000 a year to a Roth 401(k), with annualized earnings of 7% per year, would accumulate more than $1.5 million by age 67 -- all tax-free. With a traditional 401(k), he or she would owe more than $375,000 in federal taxes on withdrawals, assuming a 25% income-tax rate in retirement.

The Roth 401(k) offers some excellent estate-planning benefits, too. Although account holders must start taking distributions beginning at age 70frac12;, you can circumvent that restriction by rolling over the money to a Roth IRA. You won't have to take mandatory distributions, and your heirs will inherit the money tax-free.

You can also split your 401(k) contributions between a traditional plan, to reduce your current tax bill, and a Roth, to build up tax-free savings, as long as your total contributions don't exceed the maximum limit.

Invest creatively

2. Erratic stock-market returns and persistently low interest rates have left a lot of investors worried about the performance of their retirement portfolios. A small but growing number are turning to self-directed IRAs -- accounts with third-party custodians that allow them to diversify their retirement savings beyond the typical mutual fund menu into investments such as real estate and community bank stocks.

When Leslie Gremett switched jobs in 2005, she had accumulated about $9,000 in retirement savings. "I was leery of the stock market, so I asked some successful family friends for advice on where to invest my money," explains Gremett, a 28-year-old financial officer for a dental practice in Oceanside, Cal. That's how she learned that a new community bank near San Diego was looking for investors. "My former boss invested some money that way and doubled his money in five years."

So Gremett rolled over her 401(k) to a self-directed IRA with Trust Administration Services. Prudence would have dictated that she diversify her direct stock purchases, but she invested all $9,000 in Pacific Coast National Bank. Despite the recent trend toward consolidation among major banks, there are thousands of small community-based banks across the U.S. that fill a market niche by focusing on personalized service and small-business loans. When they grow large enough -- usually between $500 million and $1 billion in assets -- they often become targets for takeover by larger banks, which increases their value.

But before a community bank can open, it must raise funds directly from local investors. "The minimum investment is usually $2,500, so anybody in the community can invest," says Dan Hudson, president and chief executive officer of NuBank, a consulting firm that helps community banks get started and announces investment opportunities to the public.

Pacific Coast National Bank launched its initial public offering at $10 a share, raising $22 million. Recently, its shares traded over the counter for $12.50 -- a 25% jump.

We're not suggesting that you bet your retirement on community-bank stocks. Nor should your retirement savings be focused on a single investment. (Gremett now invests $100 a month -- which her boss matches dollar for dollar -- in mutual funds through the 401(k) at her new job.) But there is room in retirement savings for investing in a good idea outside the usual realm of mutual funds.

That good idea may be the stock of a community bank or a new young company whose product you use and like -- for example, Google when it went public in 2004 (its stock has more than tripled in value since the IPO). Whatever it is, investigate the company thoroughly. Read everything about it you can get your hands on. Find out about its leaders, its customers, its competitors and its balance sheet. Imagine what could go wrong. If you still see a winner, consider investing a portion of your retirement nest egg. If the stock prospers, so will your savings.

Delay social security

3. More than half of retirees choose to take reduced social security benefits as soon as they are eligible at age 62. But for some that may be a $100,000 mistake, says Steven Silbiger, author of Retire Early? Make the Smart Choices (HarperCollins, $19.95). He notes that people who take early-retirement benefits -- which can be reduced by as much as 30% compared with full benefits at the normal retirement age -- and who continue to work could lose $1 in benefits for every $2 they earn over $12,480 this year. Plus, they may end up paying higher taxes because up to 85% of social security benefits are subject to federal and sometimes state taxes once income exceeds $34,000 for individuals and $44,000 for married couples filing jointly.

Women are particularly vulnerable to the long-term impact of reduced benefits. Silbiger estimates that a woman with a projected full benefit of $955 per month who took social security at 62 and continued to work could lose $100,000 over her lifetime if she lived to 83, the average life expectancy. If she lived an additional ten years, she could lose $200,000. (Once you reach your full retirement age, however, social security will recalculate your monthly payment upward to take into account the benefits you forfeit to the earnings cap.)

Bonnie O'Donnell, 60, had considered taking early benefits. But after consulting with a Social Security Administration representative, she decided to wait until her full retirement age of 66. "I was stunned at how low my benefits would be at 62," says O'Donnell, of West Chester, Pa., who found out she was entitled to only $710 per month. If she waits until she turns 66, she will get $949, an increase of $239 per month, for the rest of her life. In O'Donnell's case, if she elected to take early benefits and work full-time for four more years -- which she must do to qualify for her state-government pension -- she would lose all of her social security benefits to the earnings cap. Once you reach full retirement age -- 65 and 6 months for those born in 1940, gradually rising to 67 for those born in 1960 and later -- you can earn as much as you like without jeopardizing social security benefits.

To O'Donnell, the choice is a no-brainer. "If you don't have any health problems and you like your job," she says, "why not keep working? Besides, there is no one to play with yet. I'll have to wait until my friends get a little older."

Social security retirement benefits are based on your highest 35 years of earnings. Like many women, O'Donnell was out of the workforce for a while -- 14 years, when she was raising her three daughters -- which lowered her average lifetime earnings. But because she was married to her former husband for more than ten years, she qualifies for spousal benefits, so her monthly check will be slightly higher than if it were based solely on her work record. Plus, if her income in her final years of work boosts her average lifetime earnings, her benefit will also increase.

In 2009, after 20 years of service, O'Donnell will qualify for a $1,000-a-month state pension, with regular cost-of-living adjustments and subsidized retiree health benefits. She also becomes eligible for medicare when she turns 65 that year.

Part of her retirement plan is to give up her big house in the Philadelphia suburbs -- and all the home-maintenance chores and expenses -- and rent an apartment close to her married daughters. "I want to be able to lock the door and go travel with my friends," she says. She also hopes to rent a place in Florida for a few months each winter.

Launch a second career

4. Six years ago, David Marshall was CEO of a publicly traded real estate investment trust in Boston. When the company was sold to private investors, he walked away with a substantial lump sum. But with no job and no urge to retire, David sought guidance on what to do next -- something that would allow him to work fewer hours and give back to his community. He signed up with New Directions, an outplacement firm that caters to executives. New Directions helps clients clarify their goals, assess their strengths and develop a plan for the next chapter of their lives.

"I thought I wanted to teach at the college level, but I wasn't willing to go to school for a PhD," says David, 57. "And I considered working for a nonprofit, but I'm not comfortable asking for money. So I decided to buy a small business that could create and retain jobs for my employees and provide them with health insurance. I thought that would be a worthy thing to do."

Using part of his buy-out settlement, he purchased three independent hardware stores in downtown Boston, which he describes as "the 7-Elevens of hardware stores" compared with such big-box giants as Home Depot. He hired managers and staff to run the day-to-day operations, but pays all the bills himself. His bookkeeping chores keep him busy ten to 15 hours per week.

The stores are profitable and generate about $200,000 in income per year for David, representing a 20% return on his investment. "I make about half as much money as I used to, but I have a lot more time to enjoy what I have," he says, including a vacation home on nearby Cape Cod, where he and his wife, Tricia, like to garden and sail. In the winter, they use their condo in Maine for ski vacations.

David is in good company. An AARP survey found that eight out of ten baby-boomers expect to work beyond normal retirement age, at least part-time. Some expect to need the money; others will do it to remain active. Many hope to launch new careers.

David says owning his own business offers several advantages. It provides health insurance for him and his employees. It creates a steady income, which is important because he will have no pension to rely on. And it allows him and Tricia to leave a cash-generating asset to their two grown daughters.

Slash your expenses

5. For years, management consultant Rick Ackerman, 61, paid a financial adviser to manage his investments. Then he decided he could do just as well himself with a well-diversified portfolio of low-cost mutual funds. The $7,500 a year he is saving on investment fees will more than pay for his increased health-insurance costs when he and his wife, Rory, 54, retire this spring. They'll begin their new phase of life with a three-month trip to Australia.

Rick and Rory rolled over all their taxable accounts and retirement savings to Fidelity Investments, and Rick monitors their portfolio regularly. "The corporation of Rick and Rory is doing fine," says Rick. "Our investments have been growing at about 8% annually over the past 18 months."

Rick, who also tracks the Ackermans' spending, planned their future budget in detail using Fidelity's Retirement Income Planner software. Rick figures that with a traditional pension from IBM, his former employer, partially subsidized retiree health benefits, and social security benefits beginning this year when he turns 62, he and Rory won't have to withdraw more than 3% per year from their $1.2-million portfolio, virtually ensuring that they will never outlive their money. (Financial experts generally recommend withdrawing no more than 4% to 5% of your nest egg each year.)

The couple is considering moving from their home near Fort Myers, Fla., where housing prices have appreciated an average of 90% over the past five years, to less expensive Columbia, S.C., where they can enjoy all the benefits of life in a college town. Although South Carolina has an income tax and Florida doesn't, Columbia has one of the lowest property-tax rates in the country because assessments are based on only 4% of market value.

The Ackermans, who own their current home free and clear, expect to pay cash for a new house if they relocate and invest any excess profit. They also prepared for future health-care expenses by buying long-term-care insurance before Rick turned 60, cutting their projected annual premiums by 20%.

Don't look for Rick on a front-porch rocking chair. "I plan to keep myself busy auditing classes, from law and architecture to languages and art," says Rick. Rory, who does contract work for a local accountant, expects to continue working, at least part-time, if they move.

Retire on the house

6. John and Marie Evans of St. Louis promised one another that they would live out their retirement years in the house that they bought in 1950. "We made a pact that we would never separate," says John, 80, a retired photographer. But after Marie, 79, suffered a stroke two years ago and required a walker and a wheelchair, "we needed money to make the bathroom big enough to get her in and out." Struggling on a fixed income, the couple solved their cash problem by taking a reverse mortgage, which let them borrow against their home equity and forgo repayment as long as they stay in the house.

Once relatively rare, the number of such backward-looking loans has increased fivefold since 2001, according to the National Reverse Mortgage Lenders Association. "The confluence of historically high home values and historically low interest rates means that people are able to take more equity out of their homes," says Peter Bell, president of the group. And rather than resisting the idea, "boomers are helping their parents get the loans," says Bronwyn Belling, of AARP. (You can download "Home Made Money," a guide to reverse mortgages.)

To qualify for a reverse mortgage, you must be at least 62 and live in the house as your principal residence. The loan, including interest, comes due only when you die or move from your home, at which point the proceeds from the sale can be used to pay off the balance. You or your heirs get to keep whatever equity has built up since you took out the mortgage. If the value of the house falls below the loan amount, the lender absorbs the difference.

Among the several reverse-mortgage programs, the most popular is the Home Equity Conversion Mortgage, backed by the Federal Housing Administration (search "reverse mortgages" at www.hud.gov). You'll generally be offered four payout choices: a lump sum, an interest-earning credit line, monthly advances paid out over a set period or smaller monthly advances that last as long as you live in your house. You may combine a credit line with an advance or choose some other combination. Most borrowers roll the cost of financing, which can hit five figures, into the loan.

No matter what the program, don't expect to pull every last coin out of the equity treasure chest. The amount you get depends on your age, local housing costs, interest rates -- which adjust monthly or yearly -- and the type of payout you choose. (For estimates of what you can expect, go to www.reversemortgage.org). Figure on getting no more than about 40% to 60% of the equity in your house. "Banks are really conservative about how much they'll allow," says Rick Van Benschoten, of Lenox Advisors, a financial-services firm. "If the house plummets in price, they're left holding the bag."

Even a relatively small windfall can pay for a new roof -- or, in the case of the Evanses, a bigger bathroom. "Nobody lies in bed at night thinking, I should get a reverse mortgage tomorrow," says Bell. "But they do lie in bed thinking, What am I going to do if these expenses come up?" In addition to remodeling the bathroom, John paid Marie's hospital bill, replaced the furnace and retired a credit-card bill that had crept dangerously high. "Last year, I was unable to maintain everything," he says. "This put me where I could function."

-- Jane Bennett Clark

Sell out and start fresh

7. Doug and Marlene Carnahan were doing a good job socking away money for retirement in their company 401(k) plans, taking full advantage of the maximum salary-deferral limits and additional "catch-up" contributions allowed for workers 50 and older. But neither was sure that they were investing money in the best way to fund their retirement, which they hope to begin in ten years.

So the Carnahans decided to start fresh and reallocate all the funds within their retirement accounts. There are no tax consequences for liquidating investment positions in a 401(k), as long as the money remains in your retirement account. "We both have excellent 401(k) plans, and both our companies offer matching contributions," says, Doug, 52, a computer engineer with Fujitsu in Kansas City. "But I have 60 funds to choose from. How do I pick the right ones?"

Despite online retirement-planning tools and general guidance on diversifying among asset classes, Doug's 401(k) plan still lacked one thing: specific advice on where to invest his money. So Doug and Marlene, 52, decided to pay for personal guidance from Smart401k. They filled out online questionnaires about their retirement goals, their time frame and their feelings about investment risk. Then they sent their plans' fund choices to Smart401k, which recommended the six best funds in each of their plans to diversify their investments. Smart401k charges $200 per year per person for the service, which includes quarterly reviews; family members in the same household get a 20% discount, so together the Carnahans pay $360 per year.

Doug and Marlene's goal is to double the size of their $600,000 retirement portfolio over the next ten years. "Smart401k put us on the right track," says Doug. "When I was doing it all myself, I was seeing more losses than gains. With its recommendations -- including funds that cover big companies, small companies, international stocks and some bonds -- I've done much better."

Plan sponsors vary widely in the amount of help they offer participants. Many provide planning tools to help you figure out how much money you will need in retirement and how much you'll need to save to reach your goals. Some offer generic advice about diversifying across various asset classes. Others contract with third-party advisers to recommend specific funds. The latest trend is toward simplification: Some companies enroll you automatically in their 401(k) plan (unless you opt out), increase your salary deferral automatically each year and offer one-stop investment solutions with balanced funds targeted to your future retirement date.

If you don't have access to retirement-planning tools or advice, Scott Revare, chief executive officer of Smart401k, suggests you keep two key principles in mind: Diversify your investments across appropriate asset classes based on your risk tolerance and time frame, and rebalance your retirement portfolio at least once a year. A recent study by Hewitt Associates found that the majority of workers made no attempt to rebalance or reallocate their 401(k) holdings last year. "Individual types of funds will make a run, as small-company stocks did last year," says Revare. "As a result, you may become overly invested in one type of fund, exposing yourself to unnecessary risk." Restoring the original percentage allocations to each fund in your 401(k) lets you realize your gains and bring your portfolio back in line with your goals.