According to the professional journal SHRM (Society for Human Resource Management), among U.S. workers aged 61 to 66, a mere 29 percent say they plan to take some sort of phased approach to retirement. Meanwhile, the share of organizations offering select employees a phased retirement approach (on an informal basis) has risen in recent years, reaching 15 percent among employers that responded to a 2019 SHRM benefits survey. The roll-out of more formal phased retirement programs, which are broadly available to all employees, has stalled at around 6 percent. So, what is phased retirement exactly? And is it something you should contemplate or, at the very least, ask your employer about? As SHRM explains, phased retirement allows older employees to reduce work hours gradually, creating a slow transition into retirement rather than a sudden departure from the workforce. In addition to reducing work hours over time, these programs initiate a partial drawdown of retirement funds from defined contributions or defined benefit retirement plans, according to SHRM. Also worth noting, this approach to slowly disengaging from work allows you to continue with employer-sponsored health coverage until you fully leave the workforce. Intrigued? Here are a few insider tips about phased retirement and its potential pros and cons. “Phased retirement allows the retirement experience to be practiced,” said Eric Ross, a certified financial planner and senior wealth advisor with Cincinnati, Ohio-based Madison Wealth Management. “During this practice period, one can begin doing the things they think they may like to do in retirement. If practice goes well, then you have a green light to move to full retirement or possibly continue in the phased approach, if that’s working for you.” This practice phase allows you to find what works well for you and what doesn’t. According to Ross, the key is to be intentional about your practice. “This can be accomplished by identifying ways in which you plan to spend your time during retirement. For example, you may anticipate spending more time with your children and grandchildren. You may discover this works well or you may also discover that can be too much of a good thing,” said Ross. “Or your idea of spending more time together does not match what your children consider to be an ideal amount of time to spend together.” “Once the income generated from a professional position stops, there’s a natural tendency to apply more attention and pressure to a retiree’s other sources of income that will support them in retirement, such as pension or investment portfolio,” said Brian Niksa, senior wealth advisor for Capstone Financial Advisors. “A gradual reduction in earned income allows the retiree to minimize the pressure they would otherwise put on their portfolio or other outside retirement income sources.” “Many people tie a lot of their self-worth and identity to their careers and productivity. If you’ve had a career for decades, it can be difficult to differentiate your work-self from your home-self, and retirement can be a jarring change,” added Jeffrey Zhou, CEO of Fig Loans. “Losing that identity can trigger depression, anxiety, and a sense of loss in retirees. Phasing retirement can help you adjust to schedules that are less and less rigorous, and workloads that diminish over a period of time. This way you can acclimatize to the retirement lifestyle rather than jump in headfirst.” “With traditional retirement, someone has to pick up where the retiree left off, with potentially months of catch-up to get back up to speed,” said Zhou. “With phased retirement, future retirees can prepare someone for their position and employers can support that preparation with training and mentorship.” As SHRM notes, by the time an employee announces they’re fully ready to retire, it’s often too late to begin a knowledge transfer (especially if it hasn’t been underway already). Many forward-looking organizations get this, which is why they’re often leaders in the phased retirement space. “Anyone who is eligible for Social Security has a defined full retirement age (FRA) based on their date of birth.” Niksa explained. “If Social Security benefits are elected to begin before full retirement age, and income is still being generated, the benefits received from Social Security could be reduced.” The reduction that applies to those who claim benefits before full retirement age can be significant, according to Niksa, as much as $1 for every $2 earned over the Social Security earnings limit. “In 2021, that limit is $18,960,” noted Niksa, “So anyone who is considering claiming their Social Security while still working, and who has not yet reached their full retirement age, should be mindful of this potential implication.” “People have been underestimating their retirement needs for years. Phased retirement options likely include some form of early access to retirement benefits that may dwindle a retiree’s overall pool of retirement benefits,” said Cicchelli. “Coupled with the possibility of receiving a reduced regular income at an earlier date than planned, phased retirement could lead to the need to access retirement savings earlier than planned. This brand of semi-retirement will simply be insufficient to meet the needs of some prospective retirees in the long term.” “Plan everything out with an advisor who can assess a phased retirement plan’s options and help decide whether you’re a good candidate for this type of program,” suggested Cicchelli. “A financial professional can provide an estimated outlook on the potential financial impact and even make recommendations for alternative measures if necessary.” And remember, even when taking a phased retirement approach, there’s a good chance you’ll live a long life in full retirement, and you’ll need your savings to last. “Saving enough to make work optional or allowing for part-time work at potentially lower pay requires advance planning,” said Rob Williams, vice president of retirement and financial planning for Charles Schwab. “Saving enough, accounting for healthcare costs, and thinking ahead about how you’ll spend your time are all critical.”
