Update Postgres on server that already has version included with system
Is it true that Postgres can happily run multiple versions of itself
  on the same server...under same OS instance?


I've run 8.3, 8.4, 9.0, and 9.1 at the same time on a single Windows server. You just need each PostgreSQL server listening on a different port. Choosing the port is part of the installation process.

I'm far to cynical to believe that PostgreSQL will never overwrite an existing data directory, but in my experience (none of it on OS/X), each version installs its own data directory.