You’ve recently announced your retirement, and the corporation you work for asks you if you want to receive your pension in the form of annuitized payments or as a lump sum distribution. What’s the difference?

An annuitized payment is a guaranteed sum that will be paid to you by your former employer for the rest of your life.  If the pension is set up as joint-and-survivorship, the payments, though smaller, will continue throughout the life of your spouse.  This means that the corporation is responsible for investing the money in such a way as to make the promised payments throughout your remaining years.

The caveats? You run the risk that the payments may go away if the company you retired from goes bankrupt, is acquired, or merges with another company. In addition, once you and your spouse have passed on, the payments stop—heirs are not entitled to any benefits. 

Let’s consider the lump sum distribution option.  If the money is given to you in one payment, you can roll it into an IRA and obtain control of the money and how it is invested.  Also, in the event of your death, this money can be passed on to your spouse or other heirs.

The caveat? Can you make the money last, or will you outlive it? The outcome will depend on your asset allocation, how those assets perform given the unpredictability of the financial markets, and your guesstimate of your mortality. 

So which strategy works best? Well, that depends on your situation.  Follow these steps to help analyze what you have and what you’ll need.

1. Estimate your monthly expenses now and project what they might look like in 10 years.  Expense worksheets are available at the U.S. Department of Labor’s Web site:  http://www.dol.gov/ebsa/publications/NRTOC.html.
2. See what your Social Security benefits will be by going to http://www.ssa.gov/planners/calculators.htm. Compare your benefits to your anticipated monthly expenses to see how much more you may need.
3. Consider your IRA and any other retirement pools of money you’ve acquired.  How much is there? How is your rate of return?  How much inflation is anticipated, and how will that affect your rate of return? What timeline are you looking at?
4. Determine your mortality on the worksheet located here: http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html. 
5. Input this information on the worksheet located at http://www.choosetosave.org/ballpark/ to determine the amount of money you will need to retire and live comfortably. Try to be conservative.  Input a lower rate of return than your portfolio is averaging and a longer life span than you anticipate for yourself. That way, if your rate of return is higher than expected and you don’t live as long as you anticipated, you increase the chances that your money will outlive you.

Now you have a good estimate of what your expenses will be and if the nest egg you’ve accumulated thus far is sufficient. So, should you take the annuitized payments of the corporate pension, or are you better off taking the lump sum?

While the corporate pension could be risky in the long run, you may want the guarantee of that income stream. If it’s flexibility you’re looking for, the lump sum distribution might be better. You can still create an income stream for yourself by taking a portion of that lump sum and putting it into an investment called an annuity. 

Many types of annuities exist, and you can choose one that suits your specific needs.  For example, some guarantee fixed periodic payments, others provide variable income streams, still others allow you to take a lump sum at some point in the future, and others pay out a death benefit.

However, because an annuity does not provide liquidity, it’s a good idea to keep the remaining portion of your money in an IRA. This way, the assets can be allocated to provide you with cash when necessary. And the investments can be diversified and continue to grow tax deferred. 

Before making a decision on either of the retirement payment options, consult an investment adviser who is experienced in preserving retirement income. Now that you’re armed with the results of your own analysis, you’ll have enough information to ask the right questions to help you determine which course of action will work best for you.