Furthermore, if you are not comfortable with the risk and responsibility associated with investing a lump sum of money and managing it over time, a fixed annuity might be a better choice.

How to choose

   First you need to know what your employer's plan offers you.  Some traditional defined benefit plans don't allow for lump-sum distributions.  If you have the choice and are faced with deciding between an annuity and a lump sum,  you must compare the value of each.

   You should note that annuitizing money in a defined contribution plan such a 401(k) usually requires rolling the money over tax-free into an IRA, and then buying an annuity.  Take into consideration that some products come with fee and surrender costs as well.

  Finally, find out if your annuity payments are adjusted for cost-of-living increases and consider the costs associated with inflation.

The best of both worlds

   Ultimately, the best way to finance your retirement is to have both a lifetime pension and some flexible assets to increase the odds that you won't outlive your remaining portfolio.  As a matter of fact, according to the Journal of Financial Planning, using 25% of your retirement assets to buy an annuity increases the odds of portfolio survival. 

For the assets that you may have saved or received in a lump sum from your pension, consider these simple steps to help stretch your money:

►Resist the temptation to over-spend.  Put yourself on a monthly budget that is in line with your new lifestyle based on plans for your life expectancy and the expected return of your investments.

►Balance your financial priorities.  Don't assume that you should use the majority of your lump-sum payment to pay off your mortgage, for example. You may want to consider an increase in your payment schedule, but these monthly payments could perhaps be paid out of your monthly income while you still get a mortgage deduction and make more of your lump sum available for investing in financial assets.

►Diversity and keep it simple. Establish a diversified portfolio of stock and bond (or stock funds and bond funds) investments.  Consider broad-based index funds.  Remember that more important than the individual investments themselves is your asset allocation mix - the proportion in which you hold them.

►Seek help.  Meet with a qualified financial advisor to help you decide which pension strategy is best for you and to assist you in building a comprehensive portfolio and investment strategy specifically for your retirement needs.

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John Gin is a certified financial planner in the New Orleans-area office of a national financial services firm.  Questions about money, credit or investments can be sent to Money Watch, The Times Picayune.

by John Gin

QUESTION: I will be retiring this year.  I will have to make a decision on whether to take a lump-sum distribution from my pension or take the monthly payments.  What factors should I consider in making this decision?  What are the pros and cons of each?

ANSWER:  When you retire, you will be faced with making many lifestyle and financial adjustments.  From a financial perspective, one of the largest changes you may face is not drawing a salary.  If you are like most people, the only ongoing income you may receive in retirement is Social Security and perhaps a pension, which can be taken either in a lump sum or in monthly payments.

   According to a study by the RAND Center for the Study of Aging, among retirees with defined-contribution plans, only about 7 percent choose to annualized their retirement payout, which would guarantee a monthly income.  The majority of the remainder instead choose to take a lump sum.

Pros and cons

   Annuitized and lump-sum distributions are not a retiree's only option.  However, they are the most commonly used.

Educate

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   Typically, retirees choose lump-sum payouts because they fear that locking into an annuity usually means that heirs can be locked out of any inheritance; if the employee and the spouse die, the payments stop.  Also, for those who have health problems that may indicate a shorter life span, the lump-sum payout may be a better choice.  Lump-sum payouts generally offer investors greater control over their money.

   However, they also come with a higher risk of overspending and outliving your savings.  With the average life expectancy of a 65-year-old inching up to almost 83 years old, the annuity option is something more retirees may want to consider instead.

   The sense of well-being that guaranteed income brings has long-lasting implications.  Retirees with annuity income show fewer signs of depression than those with comparable wealth that is not an annuitized, according to a recent study cited by CBS Marketwatch.