The day after you retire 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 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.
So, what is a phased retirement?
Also known as a partial retirement, a phased retirement consists of a gradual exit from the workforce, rather than the standard final day departure. That could mean working part time, taking on seasonal work or even starting up your own business. A phased retiree receives partial income from their reduced employment and supplements their income by beginning to take retirement account withdrawals.
A phased retirement offers many benefits, but the specifics of the plan can be complicated. Your ability to phase your retirement depends 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.
Phasing retirement can provide a trial run for the rest of your life
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, 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.
For many of us, 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 allows you a trial run at this entirely different style of living, to experience what it really means to live without work.
Phased retirement may provide greater financial security
One of the goals of retirement planning is to try to achieve financial security so that you have enough money to pursue your goals and last you throughout your nonworking life. Phasing retirement not only helps you make the transition from your post-work life, but it may also provide you an additional stream of income to continue funding your retirement plan.
An additional stream of income 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 it is, may grant you a greater sense of comfort in spending the money you’ve worked so hard to save.
If you’re looking to retire early, a partial retirement can help you extend your benefits
If you plan to retire before 65, the age when you are eligible for Medicare, a phased retirement may allow you to continue to receive health insurance from your employer benefits to avoid a gap in coverage.
It can also help you with Social Security planning. Each month in which you draw Social Security before full retirement age, benefits are reduced. 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.
Some employers have begun to offer phased retirement programs
Around 15% of employers are offering formal phased retirement programs, according to a 2019 survey.* And that number doesn’t include the phased retirees who have asked for part-time or seasonal work, outside of a formal program. This trend is likely to continue because phased retirement is often beneficial for employers, maintaining steady labor while cutting down costs and avoiding the costly process of onboarding a new employee.
For those who don’t offer a phased retirement program, there are still several options to lessen the difficulty of transition from work to retirement. Consider asking for part-time work or to be hired by your firm as an independent contractor, where you can make your own hours.
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 401(k).
Phasing retirement will require more planning
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.
Learn more about a partial retirement from our podcast, Everyday WealthTM with Soledad O’Brien and Jean Chatzky.
* SHRM. (2019). SHRM EMPLOYEE BENEFITS 2019. Retrieved August 22, 2022, from shrm.org.