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Making Your Money Last

Take a Lump Sum or Monthly Checks?

How to choose the best payout for your pension in retirement.

EDITOR'S NOTE: This article is from Kiplinger's Success With Your Money special issue. Order your copy today.

If you're eligible for a traditional pension, you may be able to choose either a monthly check for the rest of your life or a lump sum, which gives you more investment options when you roll it over to an IRA. Your decision should be based partly on health -- both yours and your company's.

If you have medical problems, or if longevity doesn't run in your family, you may want to choose the lump sum. But ask your employer whether you'd be giving up anything, such as retiree health benefits or cost-of-living adjustments on a monthly pension check.

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To help you decide which is the best deal for you, calculate how much monthly income you could receive if you used your lump sum to buy an immediate annuity (go to www.annuityshopper.com), then compare that with your monthly pension check. Men may come out ahead with an annuity because they have shorter life expectancies and receive larger monthly benefits from annuities sold by insurance companies. Women, on the other hand, may want to stick with company pensions, which are required to be gender-neutral.

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A lump sum could also be a good choice if there's a risk your company's pension plan is underfunded and might be taken over by the Pension Benefit Guaranty Corp. Although 90% of retirees in PBGC-managed plans receive their full pension benefits, higher-paid workers whose monthly checks exceed the limits of the government's insurance program ($49,500 a year for a 65-year-old whose pension is taken over in 2007) could come up short.

Don't forget your spouse. If you're married and choose to collect a pension check, you have to decide whether you want your spouse to receive survivor benefits. You'll get smaller monthly checks now, but your spouse will still get benefits if you die first.

As an alternative, some people choose to take the larger pension benefit and buy a term life-insurance policy to provide for the surviving spouse. But that could backfire if the breadwinner outlives the term policy and then dies, leaving the survivor with nothing.

Order your copy of Kiplinger's special issue Success With Your Money. It will tell you how to make the most of your money -- and make a seamless transition to the next phase of your life.

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