If you're smart about using your 401(k) plan at work, you'll probably face a few occasions when you'll have to figure out what to do with good-sized chunks of retirement money when you switch jobs. How you handle those opportunities will make a big difference to your lifestyle after you retire.

The good old days
In generations past, workers didn't have to worry too much about investing -- typically working for the same employer throughout their careers, they earned themselves a pension that, when combined with Social Security, kept many retirees financially comfortable throughout their golden years.

Those days are gone. With defined-contribution plans like 401(k)s, you're responsible for your own money, and you have to stay on your toes in order to invest intelligently. Moreover, even those who have traditional pension plans sometimes find themselves with the choice to take a lump-sum distribution -- an option that may seem appealing, especially as struggling companies make retirees increasingly leery of their former employer's ability to meet their future pension obligations.

What most people do
A recently released study from the Employee Benefits Research Institute shows that a substantial number of people do the smart thing with their old retirement plan money: They roll it over, either into an IRA or into another employer-sponsored retirement account with their new employer. For distributions greater than $50,000, nearly three-quarters of those who took lump sums rolled them into another tax-favored account.

Yet for smaller amounts, people are more likely to use those funds for other purposes. Buying a home, starting a business, or paying down debt are all popular choices for using those funds, but a significant fraction of those getting $20,000 or less from a retirement plan decide to simply spend the money on personal consumption.

Dealing with real money
Those smaller amounts along the way add up; you shouldn't just treat them as spending money. But the biggest decision most people face comes further down the road, when you're much closer to retirement. By then, you may be dealing with how to invest hundreds of thousands, or even $1 million or more -- and you may need to decide whether to accept monthly payments for the rest of your life, or take a lump sum and invest it on your own.

It's a huge decision that will have a substantial lasting impact, so before you decide, consider the pros and cons. If you choose a monthly pension, you won't have to worry about investing; you'll just get checks in the mail month after month. But if that amount proves insufficient, you won't have any flexibility to dip into future payments to spend beyond your means. And once you die, all that pension money may well be gone and unavailable to your family, depending on which payout option you chose.

In contrast, investing a lump sum carries a lot of responsibility, but you get some freedom out of it, too. You can determine your own risk profile to match your comfort level and financial needs. For instance, to provide the income a pension would pay, you may be able to use a combination of an immediate annuity and dividend-paying stocks.

You can find attractive yields even among the Dow Industrials, although some have high payout ratios that suggest that those dividends might not be sustainable:

Stock

Dividend Yield

Payout Ratio

AT&T (NYSE:T)

7.0%

76%

DuPont (NYSE:DD)

6.4%

115%

Verizon (NYSE:VZ)

6.4%

78%

Merck (NYSE:MRK)

5.6%

55%

Caterpillar (NYSE:CAT)

5.3%

40%

Pfizer (NYSE:PFE)

4.3%

108%

Kraft Foods (NYSE:KFT)

4.3%

57%

Source: Yahoo! Finance, DividendInvestor.com.

Bear in mind that you don’t want to focus solely on producing income. In order to protect yourself from potential inflation, you'll want some investments with growth prospects in your portfolio, as well as inflation hedges such as TIPS.

Don't blow it
Whichever decision you make, don't be hasty. If the idea of investing a big chunk of money on your own sounds too daunting, then find a reputable financial planner and get the help you need. Beware of potential con artists and schemers -- big lump sums are particularly attractive targets -- and get second opinions if you're not comfortable with the advice you get the first time around.

When the time comes for you to deal with a large amount of money, realize that it could be one of the most important financial decisions you ever make. Before you jump the gun, stop to consider all the ramifications of whatever choices you're given. Doing so will help you make the most informed decision possible.

More on making the most of your savings:

Whether you have a big lump sum or are saving your first dollars in a retirement account, our Rule Your Retirement service can give you the help you need. Foolish retirement expert Robert Brokamp has advice on a huge range of topics. A free 30-day trial lets you see everything we've got; just click here to get started.

Fool contributor Dan Caplinger taught his money to roll over, but luckily, playing dead isn't one of its tricks. Pfizer is a Motley Fool Inside Value pick. The Fool's disclosure policy won't let you down.