SHOULD I CONSIDER A PHASED RETIREMENT?

The day after your retirement date marks the beginning of a new chapter in your life, and the end of an old one. Quite often, after having a job for most of your life, that initial transition from full-time employment into retirement will feel rather abrupt. And despite how much you may have fantasized about your post-work life, the realities of that first Monday morning without a job – and a regular salary paycheck – can be unsettling.

Instead, what if there was a way to gradually transition into your retirement years? That solution may be available in the form of a “phased retirement,” or “partial retirement,” a growing trend in retirement planning.

Long ago, most people thought of retirement as the natural order of things, taking that step once they were no longer able to perform the duties of their job. In the previous century, this evolved to a general expectation of working until you’re about the age of 65, then living off a pension and Social Security benefits. But as pensions become less common, and the prospect of living into your 90s or longer becomes more realistic, many people are now looking at retirement differently.

At the same time, the pandemic brought seismic shifts to the world of work. The “great resignation” changed the dynamic for countless workplaces, with many employees seeking better opportunities and greater flexibility. While some people chose to leave the workforce early and avoid the risks and uncertainty that came with working in a global pandemic, those who weren’t close enough to retiring began to rethink their timelines.

Many have started to look at extending their time in the workforce to ride out the down market and retire during a more favorable environment. As a result, in 2023, the workforce participation rate among those 65 or older surpassed 20% for the first time in over 50 years.¹

On the other hand, many workers at or near the retirement age are simply not ready to stop working entirely. The sudden transition from a 9-to-5 job to complete freedom can be jarring in both emotional and financial senses. Phased retirement provides a happy medium in which workers can slowly step back from their positions and ease into retirement age.

A phased retirement agreement is a flexible arrangement that allows employees nearing retirement to gradually reduce the amount they work while still remaining in the workforce. Rather than the standard final-day departure of immediate retirement, this optional retirement program enables employees to transition to part-time schedules or lighter duties as they prepare for their full-time freedom.

That could mean:

• Working part time: A voluntary phased retirement program will often include flexible, reduced hours that minimize worker stress but maintain engagement in their professional fields.
• Taking on seasonal work: Seasonal work can be particularly appealing for some partial retirees, allowing them to enjoy extended periods of time off.
• Freelancing for clients: This path is perfect for those who want more control and flexibility in their work or whose employer doesn’t offer a phased retirement program.
• Becoming a consultant: More experienced employees may want to leverage their years of wisdom and specialty knowledge to become a consultant.
• Starting up your own business: Retirement might be the perfect time to turn that passion project into a profitable venture, giving phased retirees a fulfilling and financially rewarding activity.

Each of these options offers a distinctive set of advantages that can cater to varying needs and preferences. A phased retiree also receives partial income from their reduced work schedule and can supplement their income by beginning to take retirement account withdrawals.

Phased retirement programs offer many benefits, but the specifics of the plan can be complicated. Finding the right phased retirement arrangement for you will depend on the age you plan to retire at, your employer and a myriad of other factors. Each of these factors may influence your decision and must be considered before deciding on a retirement plan.

Potential advantages of a voluntary phased retirement program include:

• Easing into retirement and testing out post-work life
• Greater financial security than immediately retiring
• Extending health benefits and postponing Social Security enrollment
• Opportunity to take advantage of employer programs specifically for phased retirement
  

The dream of retirement looms large throughout our work years. You may imagine your retirement as an ideal life of leisure: golfing every day, beautiful beach vacations, or seeing Broadway shows. However, when planning how you will spend the rest of your life, you must take a long-term approach because, for many people, the initial novelty of retirement ultimately fades.

Even if we don’t know it, our jobs and our workplace provide a kind of social life and give us a sense of community. Leaving that behind can be daunting. A phased retirement arrangement allows for a trial run at this entirely different style of living, to experience what it really means to live without work.

One of the goals of retirement planning is to try to achieve financial security – meaning you have enough money to pursue your goals and last you throughout your nonworking life. A phased period with a part-time position not only helps you make the transition into your post-work life, but it may also provide you an additional stream of income to continue funding your retirement plan.

These earnings can also allow you to engage in some of the more pleasurable perks of retirement, which you may be unwilling to do if you’re just relying on account withdrawals. Many retirees maintain frugality in their early retirement, not because they need to but because throughout their lives, they’ve been conditioned only to save and not to spend. Maintaining employment, in whatever form, may grant you a greater sense of comfort in spending the money you’ve worked so hard to save.

If you plan to retire before 65, the age at which you are eligible for Medicare, a phased retirement may allow you to continue to receive health insurance from your employee benefits to avoid a gap in coverage.

It can also help you with Social Security planning. Each month in which you collect money from the Social Security Administration before the full retirement age will reduce your overall benefits. Income from a part-time job can help cover costs you might otherwise pay for with your benefits, allowing you to avoid drawing Social Security too early.

According to Mercer’s 2024 Global Talent Trends study, a massive 84% of employees anticipate continuing to work, in some cases reducing hours, phasing into retirement or simply playing it by ear. And globally, 36% of employers are currently offering part-time, flexible, or phased retirement options.²  This trend is likely to continue because phased retirement is often beneficial for employers, maintaining steady labor while cutting down costs and avoiding the expensive process of onboarding a new employee.

For those who don’t work for a company that offers a phased retirement program, there are still several options to lessen the difficulty of transitioning from work to retirement. Consider asking for part-time work or to be hired by your firm as an independent contractor, allowing you to make your own work schedule.

You could also consider starting up a new business, which may provide some tax advantages, and in some cases, may also allow you to continue building your retirement savings, using a Simplified Employee Pension or solo 401k.

While a phased retirement plan can have many benefits, these plans also come with some drawbacks. For instance, one of the biggest downsides of working part time is that most employers only offer health benefits to full-time employees. If you are not yet eligible for Medicare, this could mean paying for health care out of pocket.

Additionally, some pensions and life insurance policies are based on your average salary over your last few years of employment. Reducing your work hours (and therefore paychecks) with a phased retirement plan could mean lower payments from these sources.

Slowly stepping back from work might not be the right move for everyone. However, phased employment might be the perfect option if you:

• Enjoy the work you do and want to keep it in your life
• Want to find and train a successor for your position
• Are concerned about market volatility and prefer to work until you’re comfortable that your retirement income will be sustainable
• Like the idea of becoming a freelancer or consulting with your current employer
• Have a health issue or disability that makes working full time difficult
• Are looking for additional income to avoid withdrawing from Social Security or retirement accounts
• Just want to “dip your toe” in retirement before you dive into the deep end

A phased retirement can be complicated, particularly when it comes to setting a timeline and determining a sustainable withdrawal rate from your retirement account. Consider meeting with a financial planner to discuss all your options and to map out what a phased retirement would look like.

The co-hosts of Everyday Wealth are not employees or clients of EFE. They receive fixed cash compensation for acting as host, and have an incentive to endorse EFE and its planners.

¹ U.S. Bureau of Labor Statistics (2023). Labor Force Statistics from the Current Population Survey: Household Data Annual Averages. Retrieved April 15, 2024, from https://www.bls.gov/cps/cpsaat03.htm

² Mercer. (2024). Reimaging work and retirement. Retrieved August 13, 2024, from https://www.mercer.com/en-us/insights/people-strategy/future-of-work/reimaging-work-and-retirement/