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.

Lump Sum Distributions
The problem with taking your retirement account in a single payment is that you'll have to pay taxes on it right away. That's why for most people with money in a company plan, the best strategy is to take lump sum payment and roll it into an IRA, where it can continue to grow tax-deferred in a mixture of stocks and bonds. That way, you have the money in your control to invest as conservatively or aggressively as you want. If you have it in an account at a mutual fund or brokerage firm, once you are ready to start taking payments, you can request systematic withdrawals so the bulk of your funds can stay invested while you spend only what you need each year. If you have a traditional IRA, you pay income tax only on the part you withdraw. With Roth IRAs, withdrawals after age 59 1/2 are tax-free, as long as the account has been open at least five years.

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.)

Annuitization
The problem with lump sum distributions is that you have to worry about how to manage your nest egg for both growth and income. If the markets make you anxious or you simply find it troubling to be constantly liquidating principal to pay your expenses, the potential for better returns may not be worth it to you. To avoid spending principal, many retirees will simply put their retirement funds into bonds or a fixed-income account and attempt to live off the income. But the impact of inflation will eventually whittle away the value of the portfolio.

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.