One of the biggest shifts in retirement is that you stop focusing on “How much have I saved?” and start asking, “How should I take income?” The right payout method depends on your other income sources, your comfort with investment risk, your health and longevity expectations, and whether you need to protect a spouse or other dependents.
Below is a practical guide to the most common payout choices and how to evaluate them.
Step 1: Identify what kind of retirement money you’re deciding about
Defined benefit pension
A traditional pension often offers a choice between:
- Lifetime annuity payments (monthly checks), or
- A lump-sum payout (paid in cash or rolled over to an IRA).
Defined contribution plan
Plans like a 401(k) typically offer multiple ways to take money, such as:
- lump-sum withdrawal,
- leaving money in the plan,
- converting some/all to an annuity,
- rolling over to an IRA.
Pension decision: Monthly annuity vs. lump sum
Option A: Take a pension annuity (monthly payments)
Why people choose it
- Predictable income on a regular schedule for life
- No need to manage investments for that portion of retirement income
- Protection if the employer’s plan changes hands or is terminated (because you’re already in payout status).
Tradeoffs
- Payments may lose purchasing power over time if they’re fixed (inflation risk)
- Your income depends on the financial strength of the paying entity (for example, an insurer if it’s an insurance annuity).
Option B: Take a lump sum
A pension lump sum is generally calculated using what the plan would have paid as an annuity over your projected life expectancy and an interest-rate assumption. Because interest rates are part of the calculation, lump-sum amounts can change with prevailing rates (higher rates often mean a smaller lump sum).
Why people choose it
- More control over investments and withdrawal strategy
- Can be attractive if a spouse is significantly younger
- Rolling it into an IRA can preserve tax deferral until you take withdrawals
- Some people prefer it if they’re concerned about plan changes or employer events.
Tradeoffs
- You take on the responsibility of making the money last for life
- Taxes may be due immediately if taken as cash (rolling over can avoid current taxation)
- Risk of overspending or significant investment losses.
Important reality check: Pension payout choices are often difficult or impossible to change later—so treat the decision as largely permanent.
Defined contribution decision: Your main payout paths
If you’re retiring with a 401(k)-style plan, these are common options:
1) Lump-sum distribution
Taking all the money out at once can create a large taxable event unless it’s rolled into an IRA. Plans may withhold a portion for federal taxes, but you can still owe more—especially if the withdrawal pushes you into a higher bracket.
2) Keep money in the plan
This can be a strong choice if the plan has low expenses and good investment options. It may be less appealing if choices are limited, expensive, or heavily concentrated in employer stock.
3) Annuitize some or all of the account
Some plans allow you to convert part/all of your balance into a guaranteed income stream for life. The main benefit is longevity protection (you can’t outlive it), but fixed payments can erode over time due to inflation.
4) Rollover to an IRA
A rollover can preserve tax deferral, expand your investment choices, and let you control withdrawal timing. It can also help you avoid certain early-withdrawal penalties if you’re under 59½ and keep the funds in a retirement account structure.
Two “gotchas” to plan for
Required Minimum Distributions (RMDs)
Once you reach the age where RMD rules apply, you must withdraw at least a minimum amount each year from many retirement accounts. Withdrawing too little can trigger a substantial penalty on the shortfall, on top of income taxes due.
Employer stock inside a 401(k)
If you hold employer stock inside your plan, there may be special tax considerations when taking distributions of that stock. This is an area where getting qualified advice can be especially valuable before making an irreversible move.
A decision checklist you can use
When comparing payout methods, ask:
- Do I need a guaranteed “floor” of income for essentials? (housing, food, utilities)
- How important is inflation protection?
- How long do I need this money to last? (health, family longevity, spouse age)
- How comfortable am I managing investments and withdrawals for decades?
- What’s the tax impact this year if I take a lump sum vs. rollover?
- What survivor protection do I want/need for my spouse? (if applicable)
- What are the fees and rules for each option? (plan limitations, annuity terms)
Article: What the SECURE Act Changed—and What Investors Should Know Now
In early 2020, a federal law called the Setting Every Community Up for Retirement Enhancement (SECURE) Act reshaped several retirement and education-savings rules. If you’re saving for retirement, managing an inherited IRA, or planning around required withdrawals, the SECURE Act (and later updates) can change your timeline and tax strategy.
Below is a plain-English guide to the most practical takeaways.
1) Required minimum distributions started later—and have since moved again
The SECURE Act pushed the starting age for required minimum distributions (RMDs) from 70½ to 72 for many savers.
Since then, later legislation increased the starting age again: it’s now generally age 73 (with a scheduled increase to 75 in 2033, depending on birth year).
Why it matters: delaying RMDs can give investments more time to grow tax-deferred—but it can also compress withdrawals into fewer years later, which may increase taxable income in retirement.
2) More retirement plans can offer “lifetime income” options like annuities
The SECURE Act added provisions intended to make it easier for employer retirement plans to include annuity/lifetime income features, including a framework that can reduce employer liability when selecting certain providers and rules that can make some annuities more portable when changing jobs.
Why it matters: lifetime income can help manage longevity risk, but annuities can also include complex terms and fees—so the “income” label isn’t automatically a better deal.
3) Inherited IRAs changed dramatically for many non-spouse beneficiaries
Before 2020, many non-spouse heirs could “stretch” distributions over their lifetime. The SECURE Act largely replaced that with a 10-year payout rule for most non-spouse beneficiaries inheriting after 2019 (with important exceptions).
Common exceptions can include a surviving spouse, a minor child (until adulthood), disabled or chronically ill individuals, and certain beneficiaries close in age to the deceased.
Important nuance today: Depending on whether the original account owner had already started RMDs, some heirs may have to take annual distributions in years 1–9 in addition to emptying the account by the end of year 10. The IRS has issued guidance and relief in certain years while rules were being clarified.
4) Traditional IRA contributions are no longer cut off at age 70½
The SECURE Act removed the prior age limit that stopped many people from contributing to a traditional IRA after 70½ (Roth IRAs never had that specific age cap). If you have eligible earned income, you may still be able to contribute.
5) Long-term part-time workers gained expanded access to employer plans
Employers historically could exclude many part-time workers from retirement plans. The SECURE Act created a pathway for certain long-term part-time employees (based on hours worked across multiple years) to become eligible to participate in some employer-sponsored plans.
6) Auto-enrollment plans can nudge savings rates higher
For certain auto-enrollment 401(k) designs, the law increased the cap on how high automatic contribution rates can rise (after an employee’s first year in the plan).
Why it matters: auto-escalation can help people save more with less friction—especially if they don’t manually raise contributions over time.
7) A penalty exception for birth or adoption expenses
The SECURE Act allowed certain retirement account holders to take a qualified birth or adoption distribution of up to $5,000 without the usual early-withdrawal penalty (subject to timing rules and other requirements), with the option to recontribute later under specific rules.
8) 529 plans can be used for some student loan repayment
The law expanded certain 529 plan qualified distributions to include paying up to $10,000 of student loan debt (lifetime limit), along with some apprenticeship-related costs, with key tax caveats.
A quick “what should I check?” list
If you want to apply these rules to your life, the highest-impact items to verify are:
- Your RMD starting age (based on your birth year) and whether delaying the first RMD makes sense for your tax situation.
- If you inherited a retirement account: whether you’re an eligible designated beneficiary and whether annual withdrawals apply under the 10-year framework.
- If you’re working later in life: whether traditional IRA contributions still fit your plan.
- If you’re part-time: whether your hours make you eligible for your employer plan.