Typically, estate planning and retirement planning go hand in hand. Why? The more wealth you’re able to set aside for retirement — and the better job you do of managing your retirement funds — the more you’ll have left to provide for your beneficiaries after you’re gone. A key decision to make is choosing the best option for receiving payouts from a pension plan.

Lump sum or annuity?

Some defined benefit pension plans give retirees a choice between receiving payouts in the form of a lump sum or an annuity. If you have other sources of retirement income, taking a lump-sum distribution allows you to spend the money as you please. Plus, if you manage and invest the funds wisely, you may be able to achieve better returns than those provided by an annuity.

On the other hand, if you’re concerned about the risks associated with investing your pension benefits — or you don’t want the responsibility — an annuity offers guaranteed income for life. (Bear in mind that guarantees are subject to the claims-paying ability of the issuing company.)

Single-life or joint-life annuity payout?

If you choose to receive your pension benefits in the form of an annuity — or if your plan doesn’t offer a lump-sum option — most plans require you to choose between a single-life or joint-life payout. A single-life annuity provides the plan participant with monthly benefits for life. The joint and survivor option provides a smaller monthly benefit to a married participant, but the payments continue over the joint lifetimes of both spouses.

Deciding between the two monthly options requires some educated guesswork. To determine the option that will provide the greatest overall financial benefit, you’ll need to consider several factors — including your and your spouse’s actuarial life expectancies as well as factors that may affect your actual life expectancies, such as current health conditions and family medical histories. One exercise that can help you make the decision is to perform some breakeven analysis. (See “Assessing the odds.”)

It’s also important to consider your current financial needs — that is, your expenses and other assets and income sources. Even if you expect a joint and survivor annuity to yield the greatest total benefit over time, you may want to consider a single-life annuity if you need additional liquidity in the short term.

Choosing between the single-life and joint and survivor options can be an uncomfortable decision — essentially, you and your spouse are gambling on each other’s lives. And if you bet wrong, the losses can be significant. Suppose, for example, that you have the pension plan, you expect your spouse to outlive you by 10 years and you select the joint and survivor option. If your spouse outlives you by 20 years, he or she will receive a windfall. But if your spouse dies before you — or if you exceed your life expectancy — it may turn out that you would have been better off with the larger monthly benefit offered by the single-life option.

And, unfortunately, you can’t change your decision retroactively: Once you select one or the other, you’re stuck with it.

The single-life option can be a risk as well. You might choose this option, for example, if you and your spouse have comparable life expectancies or if you expect to live longer. Under those circumstances, the higher monthly payment will maximize your overall benefits. But if you die prematurely, the payments will stop.

Providing your spouse a continuing income source

If it’s important to provide your spouse with a continuing source of current income, consider combining a single-life pension payout with an insurance policy on your life. You select the single-life option, locking in a higher monthly payment for life. Next, you purchase a life insurance policy, using some of the higher monthly payment to finance the premiums.

If you die before your spouse, the death benefit provides your spouse with a source of income. If your spouse dies first, you can name a new beneficiary of the life insurance policy (a child, for example) or simply cancel or cash in the policy.

Keep in mind that the viability of this strategy depends on whether you qualify for affordable life insurance coverage. So it’s a good idea to wait until your application is approved and the policy is issued before you elect a pension payout option.

Assess your financial situation

Before making a final decision on which pension plan payout option to select, it’s worth your while to examine your family’s overall financial situation. The overview should include your current and future income needs, the needs of your spouse and children, and the availability of liquid assets to meet those needs.

Sidebar: Assessing the odds

Choosing a pension payout option involves a bit of risk, so it’s a good idea to get a handle on the odds. Using breakeven analysis can help.

Suppose, for example, that your pension plan offers a choice between a single-life annuity that pays $3,000 per month or a joint and survivor annuity that pays $2,200 per month. Assume also that you expect to live another 20 years.

The breakeven point is the number of years your spouse would have to live for the two options to generate the same total benefit.