Phased Retirement: Everything You Need to Know

Being able to retire is one of the most common long-term financial objectives and, as a result, planning for retirement is usually one of the most important components of financial planning.

After decades of hard work, retirement gives you the opportunity to check things off your bucket list, such as traveling, spending time working on your hobbies, spending time with family and friends, or simply just relaxing.

However, while most people have a general idea of what retirement tends to look like, it is important to note that the traditional definition of retirement is rapidly expanding. These days, retirement comes in many different forms, including the increasingly popular option of phased retirement.

Instead of going from working 40 hours per week to working zero hours per week, phased retirement—which comes in many different forms—helps make it possible to gradually transition from one phase of life to another. And as you’d probably expect, this sort of transition comes with a lot of possible benefits.

In this article, we will answer some of the most common questions people have about phased retirement, including what phased retirement actually is, the benefits (and drawbacks) of phased retirement, different types of phased retirement, and more.

By taking the time to learn about this increasingly popular retirement option, you can determine whether pursuing a phased retirement plan makes sense for you.

What is Phased Retirement?

The term “phased retirement” is used to describe any type of retirement plan that still involves some sort of work. This can include working fewer hours, switching to a role you are more passionate about, revamping your role entirely, or even starting your own side business. Phased retirement is something that about one quarter of workers above 60 are actively considering.

Types of Phased Retirement

As suggested, there are many different ways to pursue a phased retirement. The plan that makes the most sense for you will depend on myriad factors including your current asset distribution (especially retirement accounts such as a 401k or IRA), your ability—or desire—to work, your personal life goals, and more.

Here are just a few of the common types of phased retirement:

·         Switch to Part-Time Work: one of the common ways to phase a retirement is to simply reduce your regular work hours, such as cutting back from working 40 hours per week to working 20 hours per week (this can be done by working either fewer hours per day or fewer days per week).

·         Role Change: you might also want to consider changing your role at the company to something that is less demanding or less intense. For example, if you are the CEO or founder of the company, it can be difficult to simply say goodbye to something you’ve worked so hard to build. Picking up a new role—and perhaps mentoring the new CEO along the way—is a great way to compromise. Another example is a “retired” teacher working as a substitute teacher.

·         New Job: if you want to keep working and generating an income but are ready to pursue a passion project, the end of your working career might be a great time to do so. Working at a non-profit or a job oriented towards your hobbies might not pay as well as your previous position, but many people find these opportunities more rewarding.

·         Extended Breaks: some people might also continue working 40 hours per week, while they are working, but will phase into their retirement by significantly increasing the amount of vacation days they take per year (possibly taking months or more off at a time).

As you’d probably expect, whether any of these options are actually feasible will depend on your current employer—some are much more flexible and willing to come up with a personalized plan than others.

Related: Best Washington DC Financial Advisors (Ranked and Rated)

Benefits of Phased Retirement

Pursuing phased retirement has become an increasingly popular option in the United States. In fact, according to a 2017 survey conducted by the U.S. Government Accountability Office, 29% of people claim they plan to reduce their work hours before retiring, which represents a significant shift from the “all or nothing” approach that has dominated retirement planning for so many years.

Here are just a few of the reasons why many people are considering the phased retirement option:

·         Regular Income: obviously, the main reason people work is to generate an income. Phased retirement allows people to live an easier and more leisurely life without having to stop receiving an income altogether. This makes it easier to manage bills, late-in-life expenses, and to afford certain luxuries, such as travel.

·         Continued Benefits: employers are the largest direct providers of benefits—such as health insurance, life insurance, 401k matching, etc.—in the United States. If you are considering retirement but are not yet old enough to claim Medicare, Social Security, and other government-backed benefits, then phased retirement might be the best way to extend your benefits further.

·         Personal Fulfillment: one of the most common complaints about retirement, particularly among people who retire early, is that they do not feel satisfied with their day-to-day life. If you find your work fulfilling, then phased retirement can help give your life more structure and meaning—only this time, it will be on your terms.

·         Smoother Transitions: a phased retirement plan can help ensure that whoever is taking over your position in the future will have an opportunity to develop new skillsets and learn about their future role. If the future of the organization is something you genuinely care about, this can make a major difference.

A survey of 1,032 working seniors (conducted by Provision Living) revealed that 47% wish they were retired, 33% want to keep working as-is, and 20% want to continue working but would prefer fewer hours. In other words, having a wide area of options available is important.

Drawbacks of Phased Retirement

Of course, as is the case with any major career decision, a phased retirement plan will also have its fair share of drawbacks. The effects of these drawbacks are highly situational, so be sure to account for your personal circumstances.

Possible Loss of Benefits

At some workplaces, full benefits are only available to people who are working full time (40 hours per week), meaning that if you choose a phased retirement plan, you could end up losing them.

Financial Challenges

Many people aren’t ready to lose a major portion of their income and still be financially sound. If you jump into phased retirement too soon, it can be difficult to “go back” to working full-time, should the financial need arise.

Workload Challenges

Some companies will allow you to reduce your weekly hours or increase the amount of time you take off, only “as long as you can keep with your work.” But if the workload is not proportionately decreased, as well, then you may end up being even more stressed than before.

Company Culture

One of the big risks of partial or phased retirement—especially for those who work in highly competitive industries—is that some coworkers who work full time might not feel as if you are really part of the team or may even begin to resent you. While this is a problem they’ll have to learn to deal with on their own, it is still something worth keeping in mind.

Fortunately, with the right strategy in place, the effects of these drawbacks can be minimized or avoided.

Related: How to Budget Your Money - Ultimate Guide

Tips for Planning a Phased Retirement

When planning a phased retirement, it will be very important to create a detailed plan. To start, you’ll need to make sure you are actually in a position where you can lose a substantial portion of your income. 

Taking a close look at your retirement accounts, meeting with a financial planner, and creating a budget with built-in “what if?” projections can help you determine whether you are financially prepared to make a change.

Additionally, it will also be important to be open with your company and let them know what you are planning on doing. In many cases, your company might even have a phased retirement plan already available; this is especially true if it is a larger company that has had multiple employees pursue a phased retirement plan in the past.

Be sure to clearly explain your projected timeline, your goals, and the role you envision yourself having at the company.

Phased retirement isn’t for everyone. But there is no denying that it can be very beneficial—and even rewarding in certain situations.

With a detailed plan, clear communication, and a thorough understanding of your personal financial situation, phased retirement can often be a viable option.