The best place in the world to retire, according expatriate lifestyle magazine International Living, is sunny, cheap, cosmopolitan and 8,000 feet high in the Andes.

Cuenca, Ecuador's third-largest city, is a well-preserved colonial city of cobblestone streets and dramatic period architecture, with modern suburbs, shopping and all the comforts North American retirees might expect. Yet they can live there -- and well -- for about $17,000 a year, the magazine says. (Visit Bing for a photo gallery of Cuenca.)

Cuenca and Ecuador in particular have so much to offer, says International Living Managing Editor Laura Sheridan, that the country bumped Mexico from the top spot in the publication's Annual Retirement Index, released last month.

* Related: See a slideshow of the best places to retire

The index analyzes and ranks 29 countries in categories including real-estate costs, special benefits offered to retirees, culture, safety and stability, health care, climate, infrastructure and cost of living. The rankings are below.

"We look closely at the best opportunities worldwide for retirement living," Sheridan says. "Where will the retiree's dollars go farthest? Which country is the safest? Where is the health care best? We give top priority to those things that matter most to anyone planning for retirement, including programs with special benefits for retirees . . . things like tax breaks and discounts, for example, that various governments offer in an effort to attract investment and retirement dollars."

More on retirement:

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International Living: Where $1 goes far
Retired by 50: True stories two years later
Is frugal here to stay?
Blog: Employers continue to trim benefits

The best of the best
After the rankings were finished, International Living asked its writers and contacts in the top-ranked countries to choose their ultimate retirement spots. Cuenca topped that list. The editors wrote:

"In the place that wins this year's Top Retirement Haven, you can't ignore the doorways. In fact, if you have a camera with you, you'll find yourself taking pictures of them. This one is arched. That one square. The wood is always ancient -- like the cobbled streets you walk along. But it's carefully tended -- sanded and stained, or painted red or blue or teal.

"Look up, and you see waves of terracotta tile roofs. And rising from them, renaissance cathedral domes -- each a soft blue and white, carving a crisp arch in the cobalt sky. "

The editors cited Cuenca's intense greenery, year-round fruits and vegetables, inexpensive health care and some appealing benefits for retirees, including half-price airfares and big discounts on other expenses such as taxes, utilities and entertainment.

* MSN Travel: More info in the destination guides

But it was the glorious weather and affordable real estate that sold Ron and Donna Carlson of Camas, Wash., who expect to move full time to Cuenca by the end of 2010.

"We bought a 4,000-square-foot penthouse apartment in Cuenca with fantastic views and all the amenities we could want," Ron Carlson says. "We paid far less for it than we would have elsewhere. And we have the world's best weather."

Cuenca is almost on the equator but at 8,000 feet elevation. "The weather is perfect year round," said Kent Zimmerman, a U.S. expat who lives in Cuenca. "There are flowers everywhere, green grass and rushing rivers. The elevation sounds high (it's about the same as Aspen, Colo.), but studies continually show how healthy it is for you. It's so energizing, you feel 10 years younger." (Check the current weather in Cuenca.)

Here is International Living's monthly budget for a couple in Cuenca:

ExpenseCost (US$)
Rental of a luxury two-bedroom apartment$500
Utilities (including phone, Internet and cable television)$150
Maid (twice a week)$60
Maintenance and fuel for one car$140
Entertainment (two people dining out eight times a month)$200
Health care (four doctor visits per year for two people, divided by 12 months)$20

The Carlsons knew their retirement dollars would stretch further outside the U.S., so they began to explore the idea of retiring in Latin America. They made trips to Panama, Brazil, Mexico and Europe before settling on Cuenca.

Ecuador may be the best-kept retirement secret in the Americas, Sheridan says, especially when it comes to real-estate prices.

"For a decade now, Ecuador has been one of our favourite locations for overseas retirement," she says. "In fact, it won the top honour in 1999 and has been among our preferred locales ever since. This year, it's back at No. 1, followed by Mexico, Panama, Uruguay and Italy.

International Living's top retiree destinations

International Living's top retiree destinations

No. 1: Postcard from Cuenca, Ecuador
No. 2: The 4 C's of Merida, Mexico
No. 3: On the beach in Coronado, Panama
No. 4: Crowds flock to Punta del Este, Uruguay
No. 5: Secret passages, $15,500 homes in Calitri, Italy

"Keep in mind that every place has its pros and cons. And every country has pockets where living is easier . . . or cheaper . . . than another," Sheridan says. "In Ecuador, for instance, some expats live in small towns, like Cotacachi, in cooler mountain climates. Others live in fishing villages on the coast. And still more choose cosmopolitan cities like Quito and Cuenca."