Decades ago, retirement could resemble a prefabricated home. It was a structured affair that typically came with standard features, including an arrival date, a farewell party and a monthly pension for life.
Today’s retirement is more of a long-term do-it-yourself project, with many people continuing to work, or live more active lives. The trend toward customizing your retirement is only growing, with the latest wrinkle known as “phased retirement.”
Understanding the process
In a way, “phased retirement” is just a formal name for changes that have been unfolding for years—but it also captures how today’s retirement differs from the past.
“Retirement is increasingly a progression and a process,” says Rob Williams, managing director of income planning at the Schwab Center for Financial Research.
Retirement is increasingly a progression and a process
Unlike the all-or-nothing retirement of yesteryear, phased retirement plans—which exist as formal company programs as well as less structured arrangements between employer and employee—can allow you to scale back hours or responsibility at your job, while still keeping part-time income and benefits.
For instance, let’s say you’re a 60-year-old professional in a high-profile, demanding career. You’re financially ready for retirement. But psychologically? The longest vacation you’ve ever taken was three weeks, and you spent a good portion of that time checking email. You’d like to enjoy some free time, but you’d go into shock if you had to retire cold turkey.
A phased retirement could allow you to work half-time, three days a week, or three weeks on and one week off. The possibilities are nearly endless, depending on company parameters (or the agreement you reach with your employer).
A successful segue
Right now only about 4% of private companies have formal programs, according to the Society for Human Resource Management. But last year, the U.S. Office of Personnel Management created a program for public employees, which may well serve as model for private company plans.
In addition, a growing number of employers are open to informal, phased retirement arrangements, which can take the form of scaled-back workloads, shortened workweeks or consulting agreements.
Whether you think you might want to phase into retirement early—say, at age 59½ when you can start tapping your qualified retirement plan savings without penalty—or a few years after that, there are a few practical things you should consider, Rob cautions.
Research health care options
No matter when you retire, Medicare eligibility doesn’t start until you turn 65. Thus, you should know whether dropping to a part-time schedule will impact your company-paid health benefits. Some companies provide the exact same level of coverage to part-time workers as full-time workers; others don’t. Many determine your eligibility based on how many hours you work, providing benefits to those who work more than half time (say, 30 hours per week), and nothing—or significantly less—for those who clock fewer hours.
In the past, older workers were often afraid of separating from a job that offered health insurance because they might have pre-existing conditions preventing them from getting individual coverage. The Affordable Care Act changed that, guaranteeing that every American can buy coverage, without pre-existing condition exclusions. The price may be higher, however, than what you’re accustomed to paying through a company plan. Deductibles and co-payment amounts might also be higher.
To ensure your chosen transition goes smoothly, sit down with your benefits department and run through the rules and options (or consider whether you can get health insurance through a working spouse).
Understand your pension
To be sure, a declining number of people have traditional pensions, but if you happen to be among the lucky few, you need to learn how your plan calculates retirement benefits before you go part-time. The reason: Many old-style pensions calculate your benefit based on the average monthly wage you earn in your final three or five years of work.
For those with a traditional career path, that system usually resulted in the highest payouts. If you phase into retirement, however, you might earn half as much in those pivotal final years as you did before—significantly reducing your monthly pension.
Unfortunately, companies cannot alter the pension formula just for you. So you may have to be imaginative about how you structure the deal. Instead of staying on as an employee, for instance, you could officially retire and claim your pension, but do part-time work as an independent consultant.
Strategize about Social Security
With some exceptions, the earliest you can qualify for Social Security is age 62. If you take benefits then, they’ll be reduced based on a formula that lowers your benefits for every month you collect payments before your “full retirement age,” which ranges between 65 and 67, depending on your year of birth.
So if you opt to take a phased retirement at, say, 60, first figure out whether you’ll have enough income (or savings) to cover your living expenses until you can qualify for Social Security benefits. Or if you’re phasing into retirement at 67, gauge whether it makes sense to postpone claiming benefits until you’re 70.
Remember: The government hikes your monthly payments by 8% for each year you delay taking benefits after your full retirement age, up to age 70. On top of that, the Social Security program adjusts your benefits for inflation each year, so there’s a compounding effect that can really add up for people who are healthy and likely to live long lives.
Get the help you need
If you’re not certain whether you can afford to phase into retirement, make an appointment with a financial professional and walk through your options. And of course, once you do retire, make sure you check in regularly to ensure that your plan is on course.
“There are no guarantees,” says Rob. “You launch the rocket ship in the right direction, but you may have to course-correct along the way.”