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You Need to Know This About Phased Retirement


There are several types of retirement just as there are various times to retire. Choosing the right time to retire can be challenging, as it often means balancing your desire to leave work behind with your financial ability to do so. Phased retirement is an option you might consider if it’s offered by your employer. In a phased retirement arrangement, you don’t leave work behind full-stop. Instead, you gradually reduce your working hours little by little, easing into full retirement over time. A phased retirement strategy can be beneficial financially, though there are some potential downsides to keep in mind. Deciding when to retire is a decision best made in consultation with an experienced financial advisor.

What Is Phased Retirement?

Phased retirement describes a retirement scheme in which employees can reduce their working hours or workload without retiring fully. They would continue earning a paycheck in the meantime, based on their hours worked. At the same time, they may be eligible to begin taking distributions from an employer-sponsored retirement plan.

A phased retirement offers a way to transition into retirement slowly, rather than going from working full-time to not at all. It represents a significant departure from the traditional retirement process, in which workers effectively count down the clock until their last day of work. While it may be new and different, there are some advantages associated with choosing to phase retirement.

What Are the Benefits of Phased Retirement?

There are different reasons why workers may want to work up to full retirement, rather than leaving their jobs behind all at once. Some of the chief benefits of phasing retirement include:

  • Financial stability. During phased retirement, workers can still collect a paycheck, albeit at a reduced amount. 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 fewer hours.
  • Savings protection. If you’re able to make your budget work on a reduced income during phased retirement, that can prolong the need to take money from your retirement accounts. That can help your savings to last longer.
  • 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.

Phased retirement can also offer benefits to employers as well. Allowing employees to phase out to retirement means they’re still on hand to share their expertise and knowledge with new workers who are hired to replace them. This can make for a smoother transition for the company and ensure that newcomers are prepared to do their jobs once the time comes for older, mentor employees to retire.

Phased Retirement and Social Security Benefits

A retired womanSocial Security retirement benefits can help to supplement withdrawals from a 401(k), Individual Retirement Account (IRA), taxable brokerage account or other savings accounts. The earliest you can begin taking Social Security benefits is age 62, with normal retirement kicking in around age 66 or 67 for most people.

If you’re considering phased retirement, it’s important to understand how your Social Security benefits may be impacted if you’re drawing them while working on a part-time basis. There’s no rule saying that you can’t draw benefits and work but your benefit amount may be reduced if you’re under full retirement age and earn more than the allowed yearly earnings limit.

Specifically, your Social Security benefits are reduced by $1 for every $2 you earn above the limit. For 2021, the earnings limit is $18,960. In the year you reach full retirement age, $1 in benefits is deducted for every $3 you earn above a different limit. In 2021, the limit is $50,520.

Once you reach full retirement age, your earnings no longer count against you. And the Social Security Administration will recalculate your benefit amount so you get credit for any earnings that were withheld previously. If you’re planning a phased retirement that includes working while drawing Social Security, doing the math can give you an idea of whether your benefits are likely to be reduced.

Who Can Take Phased Retirement?

In order to take advantage of phased retirement, your employer has to offer it. For example, the federal government allows phased retirement when it’s through the mutual consent of both the employee and the employing agency. To qualify, you must have been employed full-time for the previous three years. You must also meet certain requirements depending on whether you’re covered by the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS).

State employees may also be able to take advantage of phased retirement plans. For example, if you work for a public university system as a faculty member, you may be eligible to phase retirement once you reach age 59.5. If you work for a private employer, you may be able to ask your human resources administrator or benefits coordinator about phased retirement and whether it’s offered.

If you’re eligible for phased retirement at work, it’s important to understand how it will work. Specifically, you should know how much you’ll be able to earn, whether you can take withdrawals from your employer’s retirement plan if necessary, whether there will be any changes to other employee benefits such as health insurance and how long the phased retirement period will last.

This can give you the necessary information to decide if phasing retirement makes sense. It can also help you to map out your financial strategy once phased retirement—and your career with your employer—comes to an end.

The Bottom Line

Office of a staffer in a phased retirementPhased retirement is something you might consider if you want to step away from working full-time gradually. If you have this option at work, your employer should be able to guide you through how it works and what to expect. And if you don’t have phased retirement as an option, you could still talk to your employer about the possibility of easing back on working hours until you’re ready to fully retire.

Retirement Planning Tips

  • Consider talking to a financial advisor about the possibility of phased retirement and how to make it work. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Are you saving enough for retirement? SmartAsset’s award-winning calculator can help you determine exactly how much you need to save to retire.
  • When planning a phased retirement, think about when it makes the most sense, timing-wise, to start drawing benefits. Also, consider when you want to start withdrawals from tax-advantaged versus taxable accounts to minimize your tax liability. And remember that required minimum distributions kick in for traditional 401(k) and IRA plans at age 72.

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