When it comes to retirement, the conversation is usually about money. Did you save enough? Did you start saving on time? Will it be enough to cover your expenses? Many retirees are taking the stress out of these concerns by choosing a phased retirement. But what is phased retirement, exactly? Let's take a look...
When you begin preparing for retirement you slowly begin to ease into your new lifestyle. Such as activities you used to enjoy before you worked 9-5 everyday. No one likes sudden change, most of us think about retirement as a transition. If you like transitioning into life changes, a phased retirement may be for you.
What is a Phased Retirement?
Phased retirement is just like it sounds - a path towards retirement where you slowly begin taking more vacations, working fewer hours and essentially becoming part-time on your own time.
There’s a commonly stated stat that proclaims that about 10,000 Baby Boomers hit retirement age every day in the US. That means that they are now eligible for retirement. Despite the fact that retirement is changing - Boomers are working far longer than other generations who reach retirement age - the fact remains that Boomers are starting to make a big exit from the workforce, taking a lot of their skills, knowledge, and proven leadership skills with them.
The phased method is gaining momentum due to this reason and several others; One being people are living longer, for financial and personal reasons they may need to phase into retirement to keep a steady stream of income that will last 20+ years. The second reason being jobs are becoming less manual and can be performed at home. The pandemic was a great indicator of this. Lastly, more employers are becoming more accommodating towards phased employee exits due to baby boomers reaching retirement.
New Shift in Retirement Trends
The idea of retirement shifted from working until you’re 65, to completely stopping work and living off your savings, pension and Social Security until you die. As of late, the whole paradigm has shifted. Some individuals want to be financially independent and retire early, where they save and invest carefully now so they can enjoy a long retirement while young enough to appreciate it.
People on the other end of that spectrum may find their careers to be satisfying enough that they plan to work their whole lives. Realistically, both these retirement goals may end up utilizing some kind of phased retirement. Regardless of the many reasons one may have, a phased retirement should be considered as a future retiree’s plan. The reasons can be both financial and emotional, however, they both bear consideration, even if it's only a backup retirement strategy.
Pros and Cons of a Phased Retirement
This alternative to the traditional here-today, gone-tomorrow method of leaving one’s job has become fairly popular among Baby Boomers in recent years. But before you make a decision on whether to embark on this transitioning journey, be sure to know both the benefits and drawbacks of a phased retirement.
The Main Financial Motivators
The two main financial motivators in retirement are driven by government benefits: Medicare and Social Security. Both have age considerations. Medicare doesn’t happen until age 65 and Social Security shouldn’t happen until at least age 67 - which is considered full retirement age.
So what happens if you want to retire earlier than these ages? You may consider phasing out of work rather than just quitting. This way you can afford to live comfortably before your government benefits kick in.
The Main Personal Motivators
Why should you consider a phased approach to retiring? One reason might be that you haven't been retired before, and a phased approach allows you ease into your golden years. Phased retirement can give you a chance to try things before 100% committing. It's important to remember that retirement is not a one size fits all plan, and it looks different for everyone based on their needs.
With phasing intoretirement, you can test how retirement will work for you. Specifically, by leaving your current job, and potentially finding a job that involves less hours, less stress, or fewer commitments. You can see if you really want to take on your beloved hobby that much. Or you can take on some of the volunteer work you’ve wanted to do for years, and see how you handle having more time on your hands.
Further Pros:
Financial stability. During phased retirement, workers can still collect a paycheck, just for less money. They can supplement their pay with withdrawals from company-sponsored retirement plans if necessary.
- Continue accumulating wealth. If your employer offers a phased retirement plan, there may be provisions that allow you to continue saving for retirement or earning retirement benefits through a pension. That means you don’t miss out on opportunities to add to your wealth, even if you’re working less.
- Mental/emotional health. One of the negative side effects of retirement is that workers may feel lost or without purpose once they’re no longer on the job. Working on a part-time basis during a phased retirement can yield mental and emotional benefits if it makes older employees feel fulfilled.
- Prepare for the real thing. Phasing retirement and continuing to work reduced hours can give you an idea of what life might be like once you fully retire. This can help you decide how you want to use your time or even whether retiring is what you truly want to do.
Problems a Phased Retirement
While phased retirement offers a slew of positives for your business, there are quite a few downsides that your plan will have to address if you want it to be successful:
- Could reduce your pension. If you work for an employer that offers a defined benefit pension plan (the kind that guarantees monthly payouts), the plan’s formula may penalize you for taking phased retirement. These pensions often base their payments on your average salary during your final years at the employer.
- It could halt your 401(k) contributions. Your employer might not let you continue participating in its retirement savings plan if you cut back to part-time work.
- The potential to lose your health care coverage or pay more for it. Many employers don’t offer healthcare to part-time employees or charge these workers higher premiums than full-time employees. So if you begin phased retirement before Medicare kicks in at age 65, you might find yourself uninsured and facing steep out-of-pocket health costs.
- Possibly smaller life insurance benefits for your spouse. Often, the size of employer-sponsored life insurance death benefits is a multiple of your salary. By cutting your pay, you could also be cutting the insurance payout.
- It could reduce your Social Security payments. Your Social Security benefits are determined by your average earnings during your 35 highest-income years. If your phased retirement’s reduced salary means you will need to start collecting Social Security before the program's full retirement age (now between 66 and 67), you’ll see your benefits cut byas much as 30 percent.
So, with a phased retirement program, retirees can slowly make the switch instead of abruptly changing their entire lives. But there are many laws, regulations, and other compliance issues that need to be addressed before implementing a plan and plans need to be flexible enough to ensure that they do not impact other benefits. With all of that, phased retirement can be great if a company wants to go through the motions of creating one and it suits your retirement outlook.
Final Thoughts
Phased retirement is a concept, not a particular legal or employment status. Your employer may be willing to let you work reduced hours, cut out stressful job responsibilities, or time-share with another employee. Whatever the case may be, attention should be brought upon the details of the transition. Cutting back on hours could be ideal unless it disqualifies you for your company’s health insurance or other benefits.
Whatever your retirement strategy, there are risks to identify and manage as you navigate retired life. One key factor remains the same: the more you prepare, the less surprises you'll face along the way.
At Agemy Financial Strategies, our first priority is helping you take care of yourself and your family. Click here to connect a convenient time for your complimentary 30 minute consultation. Our Fiduciary financial advisors in Guildford, CT and Denver, CO are looking forward to speaking with you.