Many companies are abandoning their traditional defined benefit pension plan — in which a specified future benefit is promised and the employee doesn't contribute savings to the plan — in favor of less-expensive defined contribution plans such as 401(k)s in for-profit companies and 403(b)s in nonprofit organizations. If you're lucky enough to still work under a pension, it's important to understand how the benefit works and how it should fit in with the rest of your retirement planning.

Remember, pensions are only as strong as the promise of the company or government offering them. Pensions can be closed or frozen. Benefit amounts can be changed or inflation adjustments reduced if the employer decides to cut costs.

Calculating the Real Value

Your pension plan will promise a series of payments for the rest of your life. The current value of the pension is roughly equal to the amount you would need to have invested to pay yourself the same benefit. (Check Appendix B for a list of calculators to help you arrive at that figure.) Knowing the equivalent value of your pension is necessary to help you decide whether it makes sense for you to work extra years in the job.

Don't forget to factor in the pension when you're tallying assets for a divorce. Calculate the present pension value and include it as an asset. Decide, based on the value of the asset and the strength of the company offering the pension, whether you want to include the pension in the list of assets you request. Since companies can alter pension benefits, if there are other assets equal in value, they might be a better choice. The old adage is right: a bird in the hand is worth two in the bush.

Pension benefits often ramp up quickly in the last few years of the worker's career. Consider this if you're deciding to retire early. One or two extra years on the job could mean a lot of extra money in your retirement.

Lump Sum Versus Annuity

Many pensions offer a choice between taking a lump sum or a regular payment called an annuity payment. The annuity option will also include choices that provide a lower current benefit and then continue making payments to the pensioner's spouse when the pensioner dies. Most pensions currently revert back to the higher benefit if the spousal option was chosen and then the spouse dies first.

Carefully compare the current value of the pension payments versus the lump sum the employer is offering. Often, the employer is able to offer annuity payments higher than you could achieve on your own after taking a lump sum payout. That said, if you're concerned about the financial health of the employer, taking the lump sum may afford greater peace of mind.

Maxing Your Benefit

Working extra years is often the best way to increase your pension benefit, but it may not be an option for you. Carefully planning which spousal benefit to pick and deciding whether to buy back years are other ways to be sure you get as much as you can from the pension. Planning for windfall provisions that affect state pensions and social security benefits is also important.

The annuity options of your pension will offer several choices that pay your spouse if you die first. Each reduces your monthly pension payments by a certain amount, and then pays your spouse a corresponding amount. Think about how your other assets and your spouse's pension income work into this choice.

Government pensions typically offer buy-back provisions. That means if you worked for the government then left the job, taking your pension as a lump-sum rollover to an IRA, and later returned to the government, you can buy back the years you missed at interest. Use the present-value pension calculators to determine if the investment will be worth it in your case.

Employees covered by government pensions often fall under the windfall provision. This provision reduces your social security benefit in an amount related to your other government pension. Check the Social Security website for a tool that will help calculate how the provision affects you.