Pensions are becoming uncommon, but if you're one of the lucky American workers still on track to receive a pension, you're likely debating one important question: lump sum or monthly check? The decision is difficult, and determining the right answer depends on your individual situation. However, here are some guidelines to keep in mind as you consider your options.

Lump sum or pension? Savings matter

Retirement is getting increasingly expensive, and in many cases, workers aren't saving enough to guarantee a financially secure retirement. 

An older man scratching his head while looking at a piece of paper.

IMAGE SOURCE: GETTY IMAGES.

According to Fidelity Investments, one of the country's biggest administrators of retirement plans, the typical American worker saving for retirement has salted away $100,000 in retirement savings. In addition to those savings, workers income will also come from Social Security, which is designed to replace about 40% of a person's pre-retirement income.

While $100,000 may sound like a big sum, the reality is that you may need four to five times that, or more, in savings to avoid outliving your money. In retirement, it's recommended that the average person balance investments between risky stocks and less-risky bonds, and based on historical returns, the common advice is for retirees to avoid withdrawing more than 4% per year from their savings to avoid running out of money in retirement. 

According to the latest government numbers, the average over-65 household is spending about $45,000 annually in retirement, and according to the Social Security Administration, the average retired couple collects about $27,100 in Social Security per year. If you're using savings to bridge the gap between income and expenses you'd need a portfolio valued at $453,000 if you use the 4%-rule.

Therefore, the question of whether to take a lump-sum or pension might be better answered by the question: can I afford my monthly bills?

If you need to rely on your savings to make up the difference between Social Security income and monthly spending, then it may be better to take the safe route and go with the pension, rather than the lump sum. Why? Because while markets historically increase, they don't do so in a straight line. Invest too aggressively, and a bear market could shrink your portfolio to levels that no longer provide enough income to cover your expenses. In that situation, you could be forced to significantly increase your withdrawal rate, which is a sure-fire way to run out of money in retirement.

A stethoscope listening to a piggy bank.

IMAGE SOURCE: GETTY IMAGES.

What about health? How does that impact my decision?

If you're as healthy as an ox, you could wind up collecting more in lifetime benefits by taking the pension. Pensions pay you a fixed amount of money for as long as you live, and when you take your pension you can often choose an option that allows payments to continue to your spouse after your death. If you and your spouse are healthy, or your spouse is significantly younger than you, then going the pension route could pay off.

Alternatively, if you're in poor health, then taking a lump sum payment and depositing it into an IRA could be better, particularly if you're single. Required minimum distributions from an IRA don't begin until age 70.5, and even then, the distributions are relatively small. Thus, if you pass away young, tucking a lump sum payment into an IRA can provide heirs, such as children, with financial peace of mind. Before considering this strategy, however, remember that advances in healthcare are coming more quickly than ever, and that means you could be significantly underestimating your life expectancy.

A confused older man shrugging his shoulders.

IMAGE SOURCE: GETTY IMAGES.

What about taxes?

Money paid to you from a pension or taken as a lump sum will be taxed at your income tax rate. So, if you take a pension, you'll pay income taxes on your annual pension income, and if you take a lump sum, you'll pay income tax on the entire amount up front, unless you roll it into an IRA. 

The tax bill associated with a lump sum could be significant if you don't roll it into an IRA, and it pushes you into the highest income tax bracket, which is currently 39.6%. Thus, consider taxes carefully before choosing a lump sum. If you roll your lump sum directly into an IRA or deposit it into an IRA within 60 days of receiving it, then you'll only pay income taxes on your annual IRA withdrawals, which, as I stated above, can be put off until required minimum distributions kick in at age 70.5.

Is there a way to have my cake and eat it too?

If you take your pension, continue working, and don't need the pension income to cover your monthly expenses, consider investing some of your after-tax pension income in a Roth IRA. Roth IRA's aren't subject to required minimum distributions, and if you're age 50 and up, you can contribute the lesser of your earnings from work or $6,500 in 2017. Future withdrawals of contributions and gains won't be taxed, as long as you meet some basic criteria, and because money doesn't have to be withdrawn in your lifetime, these accounts can be a savvy estate planning tool.

Furthermore, entrepreneurs may be able to save even more if they qualify for a Roth Solo 401(k). In 2017, business owners age 50 and up can stash up to $24,000 of earnings into a Roth Solo 401(k).

If receiving a pension provides you with the flexibility to max out contributions to these accounts, it could be like having your cake and eating it too. Of course, these strategies can be a bit complex, and there are rules to follow, so make sure you consult with your tax attorney to determine what type of account is best for you. 

The Motley Fool has a disclosure policy.