Now That You're Retiring

Updated on August 18, 2008.

FIGURING OUT HOW TO LIVE off of your retirement savings is as much a personal issue as it is a financial decision. You have to come up with a strategy that will allow you to enjoy spending the money you've saved without constantly worrying that you're running through it too quickly.

When you leave your job, you must decide whether to take the money in one lump sum, leave it in a retirement account, or annuitize it — that is, contract to have it paid out to you in regular installments. You can either have your company set up an installment plan, or you can buy an annuity. The number of variables involved in any strategy, however, is huge. So your best bet is to find a professional you're comfortable with and go over your alternatives. The aim here is to merely help you understand the rules and options.

In certain cases, however, it can make sense to simply take a lump sum, pay your taxes on it, and do with it what you will. Here are a few examples:

For Smaller Distributions. The reason: with a small distribution, it's less likely you'll be pushed into a higher tax bracket or lose out on income sensitive tax breaks. Also if you were born before 1936, you may qualify for 10-year averaging, which will cut your tax bill.

If You Have Other Assets to Live On. If you have a specific purpose in mind for your 401(k) distribution, a lump sum also makes sense. Suppose you want to buy a new retirement home in Florida, for instance, or you have your eye on a yacht. Just understand that if you have a large account, you'll be taking a tax hit that can be substantial. (Again, if you were born before 1936, the 10-year averaging rule may soften the blow.)

Another option is to annuitize a portion of your retirement savings, either by requesting installment payments directly from your company plan or by purchasing an annuity with the after-tax proceeds of a lump sum distribution. If you want to start receiving payments from your plan as soon as you leave the company, the simplest option may be to ask for installment payments. Essentially, your employer uses your funds to buy an "immediate" annuity, guaranteeing you a fixed rate of income for the rest of your life. You only pay income taxes on the annual amount distributed from the fund, so the rest of your savings continues to grow tax-deferred.

You can also buy an immediate annuity on your own with a lump sum. Before you opt for your company's plan, you should compare it with the annuities offered by insurers and some mutual fund companies. While annuities aren't great investments, they do provide retirees with a guaranteed income stream for life.