When it is time to retire, your company's retirement plan will offer you several ways with which to start collecting your retirement benefits. The payout option you elect is probably one of the most important decisions you'll ever have to make. That's because your decision is irrevocable. Although retirement may be more than just a few years away, understanding your options can be helpful in your planning.

With a defined benefit plan, your employer may give you a choice of a fixed monthly payout, known as an annuity, a lump sum you can invest on your own, or a combination of both. With a defined contribution plan, you may be able to 1) "annuitize" your total investment and receive a fixed monthly income, 2) leave it in the plan until you need it (at least until age 72 (70 ½ if you reach 70 ½ before January 1, 2020), 3) take it as a lump-sum distribution and report it as taxable income in the current year, or 4) defer taxes by rolling it over to a traditional IRA, or rolling it over to a new employer's plan. You can postpone distributions from your retirement plans (but not from your traditional IRA) if you are still employed by the plan sponsor, even if you are older than 72 (70 ½ if you reach 70 ½ before January 1, 2020)(this does not apply to you if you are a 5% owner). Distributions from a Roth IRA can be postponed beyond age 72 (70 ½ if you reach 70 ½ before January 1, 2020) whether you are employed or not. In

An annuity basically provides a fixed income to you over your lifetime or a fixed period of years. Here are the most common annuity payouts:

• A single life annuity pays you a fixed monthly income for life. It is commonly described as "an income you cannot outlive." Because the payments will cease the day you die, rather than continuing to a beneficiary, this option will provide you with the largest monthly benefit.
• A joint and survivor annuity allows for payments to continue to a beneficiary (or beneficiaries) at your death. If you're married, federal law requires you to elect this form of annuity payout unless your spouse signs an official notarized statement waiving his or her rights to your pension. Since your monthly benefit will extend beyond your lifetime, the amount of your monthly fixed income will be reduced depending on the percentage of joint and survivor annuity you elect.
• A period certain and life annuity is a reduced monthly benefit you receive for life. If you die before the end of the certain period, your designated beneficiary will continue to receive the same monthly payment until the end of that period. While the 10 year period certain and life annuity is the most common, period certain payout terms can range from 5 to 20 years.
• If you are eligible for benefits from a defined-benefit plan, your employer may offer you a social security leveling option. This is typically an option for individuals who want to retire early, but need the income from both social security and a pension to make it financially possible. Suppose you are over age 55 and you'd like to retire before age 62 (the earliest age that you can collect Social Security benefits). If you elect this option, your monthly fixed income from your employer plan will include your estimated Social Security benefit. Once Social Security payments begin at age 62, your monthly pension benefit from your employer plan is reduced by the amount of the Social Security payment. The end result is you have a level income for your lifetime. But the level payment will be less (perhaps much less) than if you waited to age 65 or later to retire.

Look at the table below to see how the various monthly annuity options compare:

*J&S - Joint and Survivor

(Assumes the employee is age 65 and spouse is age 62 when annuity payments commence. Payments under your plan in your personal circumstance may be more or less.)

A lump sum distribution is an amount of money you take as a total payment of your benefits. You will be required to pay taxes on the lump-sum distribution unless you decide to roll it over to a traditional IRA or another qualified plan. If your defined-benefit pension plan allows you to take a lump-sum distribution, the amount you receive represents the present value of all future benefits. If you elect to receive a lump-sum distribution, neither you nor your beneficiary will receive any further payments.

There are several factors you will need to consider when making the decision between annuity and lump sum, including what other assets you may have and how comfortable you are managing your own money. If you leave your job before you retire, you should plan on moving your retirement plan savings. And if you need to make an early withdrawal, you need to do some work to minimize any financial penalties.