Webster’s Dictionary is always searching America’s Lexicon landscape for words or phases that are becoming popular on their way to becoming permanent. “Phased retirement” is a term we have seen with more and more usage in recent years brought on by many factors such as a sour economy, longer life spans and members of the baby boomer generation rewriting the book on retirement.
Phased retirement is a catch all term for retiring by gradually decreasing work time instead of abruptly upon reaching retirement age moving to Florida to be full time on the golf course. Your decision to phase in retirement can be on your own terms or by necessity. That is, more and more retirement age people find themselves in a no choice situation to keep working because simply they can’t afford to retire as soon as they’d hoped.
Others don’t wish to clock from 95 mph to zero in one stop. They want to gradually move into full time retirement by continuing to work part time, do volunteer work or tackle hobbies left on the shelve during their full-time working years. Either way, if you are considering a phased retirement you should be ready for some very different financial challenges that usually do not occur with the traditional retirement process.
Sure, the prime financial benefit of a phased retirement is that you will continue to get a paycheck, which may lessen the need to draw on your retirement savings, allowing your money to grow further.
Conversely, when you reduce work hours and salary, it could have a direct impact on your benefits at your company.
Here are a few considerations:
• Life insurance: May be tied to a multiple of your salary
• Long-term disability insurance: Determine what affect is has if you continue working with this form of insurance
• Company health insurance: Check your company health coverage to see if reducing work hours will affect eligibility
• Social Security: Phased in retirement could reduce benefits if you begin to collect SS before reaching retirement age and continue to work. (Each year before full retirement age is reached, the SS benefit will be reduced by $1 for every $2 you earn over a set limit, which is $14,160 for this year. The year when your client reaches retirement age, it’s $1 for every $3 earned to income limit of $37,680 for this year).
• Pension and other retirement benefits: This is a critical area. You could be vulnerable if your company doesn’t subscribe to letting employees receive pension benefits earlier. NOTE: Federal law allows workers to take pension benefits at age 62.
Typically, pensions are formulated by an employee’s service years and salary during the final days of his/her last days of employment. You can see, by phasing in retirement, the lower salary could reduce earning additional pension benefits. It’s important to check this out with your place of employment.
What about your 401(k)? Will you still be able to participate if working hours are reduced to part-time?
You might have to be creative in long term prospects of you considering both the extra income you would be receiving as a part-time working employee either at the original company or something unrelated and the long term effects on your pension and other savings programs. Using your savings funds to increase your assets value in separate accounts or annuities might be good options as you age.
As more and more companies consider the value of phased retirement, restrictions will undoubtedly loosen up. After all, not only does this reduce the compensation packages of long-term employees but also company sponsored phased retirement programs can be used to retain skilled older employees who would otherwise retire (especially in sectors where there is a shortage of entry-level job applicants). This can reduce labor costs or arrange training of replacement employees by older workers. While currently only 5 percent of midsize and large companies offer a formal phased retirement program, nearly 60 percent expect to develop one in the next five years, according to a recent survey by Hewitt Associates.
A growing consensus exists that the nature of retirement is changing. No longer do most workers wish to experience a sudden end to work, followed by an equally sudden onset of full-time retirement. Instead, many workers wish to ease in to retirement, transitioning out of the workforce with a reduced workload.
My advice is to be alert to this accelerated trend of phased retirement and develop asset strategies to accommodate your needs desiring this retirement lifestyle.