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If retirement is less than five years away and you're eligible for a qualified retirement plan benefit, you should start evaluating which payout option might be best for you. While this decision doesn't become critical until retirement is staring you in the face, projecting which payout looks best can help you make necessary adjustments today. Should you save more? Will it be necessary for you to purchase additional life insurance? There are many small decisions along the way before making the big decision: Should you take an annuity payout or a lump-sum distribution?

Both defined benefit plans and defined contribution plans may offer you a choice of payout options. You may decide to take an annuity payout or lump-sum distribution based on the type of plan you have, and whether you have one or both types of plans. To help you plan and avoid some costly mistakes, consider the following questions:

• How comfortable are you managing your own money? Do you want to be responsible for making sure you have an adequate income for the rest of your life? If you're not an investor, plan to take the annuity or hire an investment manager if you'd prefer a lump-sum distribution.
• When will you need the money? If you have both types of plans and don't need all the income at once, consider taking an annuity payout from your defined-benefit plan and let your money grow tax-deferred in the defined contribution plan.
• What other income sources will you have? If your only other source of income is Social Security and you're not comfortable with investing, consider taking the annuity. This way, the burden of making your retirement income last for a lifetime rests with your company. Social Security has cost of living increases to help you offset the eroding effect inflation has on your fixed monthly income.
• How is your health? If you have a strong indication that you might not live very long and no one depends on you for income, plan on taking the lump-sum distribution. Otherwise, your decision depends on how you answer the other questions.
• Will others (assuming you're not married) be dependent on your income? You may have a parent or child that is financially dependent on you. You may want to consider a period certain annuity, naming him or her as your designated beneficiary. Although you may have to survive on less income, you have the comfort of knowing an income will continue to your beneficiary if you die while he or she still needs financial support. Your monthly check won't be as big as if you elected the single life annuity, so consider saving more now.
• Will your spouse need the income if you die? You'll have to ask yourself some more questions to answer this one. Does your spouse have his or her own pension plan? What will his or her projected Social Security benefit be? How much life insurance do you and your spouse have, and will you be keeping it for your lifetime? What other income-producing assets will you have? How long will your spouse need the income? Make sure that your retirement planning takes into consideration the possibility of each of you predeceasing the other.

Your employer should be able to provide you with estimated payout projections of the various annuity options.