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Is Phased Retirement the Right Move?

Making the transition from working 40+ hours a week to suddenly having tons of free time can be mentally jarring for some retirees, not to mention the impact it can have on your finances. Without something to occupy their time and a regular paycheck coming in, many older workers may feel adrift. For some, a phased retirement simply makes more sense. Offered by some private companies and now the federal government, the trend of letting workers cut back gradually is catching on. But it may not be right for everyone.

Find out now: How much do I need to save for retirement?

What Phased Retirement Involves

Phased retirement plans vary depending on your employer. If you work for a private corporation, you may be allowed to choose for yourself how many hours you’d like to work each week until you fully retire.

Some programs mandate that you show up to the office at least half-time. How long the transition takes can also vary, typically lasting between one and five years. The idea is to give both you and your employer enough time to adjust.

The phased retirement plan available to federal employees has more defined guidelines. Qualification is based on your age, years of service and whether you’re covered under the Civil Service Retirement System of the Federal Employees Retirement System.

In both scenarios, you have to have at least 30 years of service, but the minimum age ranges from 55 to 57, depending on which system your benefits are paid through. Federal employees who go the phased retirement route are required to work at least 20 hours a week, and there’s also a mentoring requirement to help prepare those who’ll eventually fill their positions.

Benefits of Phased Retirement

There’s a number of reasons why you might want to think about phased retirement if it’s an option your employer offers. It gives you an opportunity to continue contributing to your organization, but you’re no longer obligated to devote all your time to work. If you want to pick up a hobby, volunteer or start a business on the side, phased retirement allows you the freedom to do so.

Another obvious advantage is that you still have money coming in. Although it’s likely less than what you’re used to, you’re not having to rely fully on your retirement accounts or savings to cover your expenses. Depending on how your employer’s retirement plan is structured, you may also be able to continue contributing to your 401(k) or pension right up until you retire.

6 Ways to Keep Retirement Costs Down

Employers also benefit from allowing workers to choose phased retirement. It can cut down on overhead costs and they won’t lose the skills and experience you bring to the table all at once. You’re able to pass on your knowledge to the next generation of workers over a longer period of time, rather than trying to train someone to take on your role within just a few weeks.

Drawbacks to Consider

Like anything else, there are a few potential snags to keep in mind if you’re considering phased retirement. Reducing your weekly workload can affect your benefits package, including your pension. And while defined benefit plans are becoming less common, there are still companies that offer them. Moreover, if you’re set to receive an annuity that’s calculated based on your salary during your final years of employment, phased retirement could substantially diminish its value.

Regarding health insurance, if you’re covered under your employer’s plan, your eligibility to participate may also be affected if you decide to slash your hours. For workers who are still too young to switch over to Medicare, that can be particularly problematic if you’re suddenly responsible for footing the entire bill for your healthcare costs on a reduced salary. It can also jeopardize your spouse or other dependents who are enrolled under your insurance plan.

Finally, you have to think about how retiring gradually could affect your Social Security payout. Bringing in a lower salary directly affects the amount you’re putting into the system, and it could decrease the amount you’re eligible to receive if the phased retirement period is used in your benefits calculation.

Find out now: How should I save for retirement?

If you’re planning on tapping Social Security before you reach the federal full retirement age, you might not feel the pinch as much since your benefits would already be reduced.

Final Word

There’s a lot that comes into play when deciding whether to take phased retirement, but it ultimately comes down to where you are financially and how you feel about easing into it over time. Training your replacement can be an awkward situation, but there’s an upside since you’ll have plenty of time to plan your retirement party.

Photo credit: flickr

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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