Officials say Bailey had returned home from working an overnight shift and was cleaning his new car. They say several people approached him and may have tried to steal the vehicle. No arrests have been made.
Next month, Bailey would have turned 63, the mandatory retirement age for Chicago police.
Bailey is the third officer to be shot and killed in Chicago since May.
Mayor Richard Daley called the shooting "a tragic, stunning reminder of the senseless violence that stalks too many of our neighborhoods."