Planning a Phased Retirement
I don’t have any statistics to cite but my belief is that more baby boomers are thinking about a phased retirement. There seem to be fewer folks who can financially or emotionally adjust to going from full-time employment to no employment in a single leap. I am in that category. Deciding when to retire is an important first step. Planning how that will happen is equally critical.
What is a Phased Retirement?
Let’s start with a definition of “phased retirement” or at least the definition that I like to use. In a phased retirement, the transition from full-time employment to not working at all is gradual and not made in a single leap from one stage to the other. There can be multiple phases or transitions as part of a planned decrease in paid work activity and corresponding increase in non-paid activity.
In some cases, the phased wind-down occurs in your present job, with the cooperation and understanding of your employer. In other cases, a phased retirement plan may require leaving your full-time job entirely and moving to a part-time job with a different employer, perhaps in an entirely different field altogether.
In either case, one of the goals of a phased retirement (at least in my mind) is to eliminate that “I’m working for the weekend” feeling which all of us occasionally experience in a full-time job.
What are the Advantages of a Phased Retirement?
I can think of several good reasons to leave full-time working life in phases rather than abruptly:
1. Emotional Preparation. Many new retirees report difficulty in losing their connections with work and with fellow workers. This can effect your feeling of self-worth as you search for other interests, activities, and people to interact with. A phased retirement allows you more time to adjust and to explore your proper place in a retired world.
2. Financial Benefits. A phased retirement means a continuation of income and, hopefully, a continuation of benefits. This can allow you to begin the retirement process earlier. Even if you have a pension and/or plan to take Social Security at age 62, there is still that issue of healthcare, since Medicare eligibility doesn’t begin until age 65. This may change somewhat under proposed healthcare reform but any such changes are unknown and won’t be immediately effective anyway. If the continued part-time income allows you to delay claiming Social Security retirement benefits, that can improve long-term finances for you and for a surviving spouse.
3. Mental Health Benefits. First, recent studies tell us that skewed work-life balance is a major source of stress in our lives. Phasing into retired life can immediately relieve some of that stress. Second, another study tells us that retirees who work part-time are healthier than those who move abruptly into complete retirement. An interesting result from that same study is that phased retirement was also beneficial to mental health, but only if the part-time work was related to the retiree’s previous career.
4. Keeping Your Options Open. Another advantage of a phased retirement is that you can enter your phase-out period but keep your exit options open. For example, while you are working part-time you can assess the overall economic environment and its impact on your investments before deciding when to stop working entirely. That can be less stressful than retiring completely and then being forced to “unretire” when things don’t go well financially.
Making a Phased Retirement Plan
So how does one plan for a phased retirement? There probably is no one-size-fits-all planning process. Differences in ages, health, availability of pension income, etc. can significantly impact the plan. But I think there are some common elements.
1. Be Prepared for a Shortened Plan. It’s unwise to start a phased retirement unless you are prepared for a worst case scenario, that being the complete loss of any employment income. No job is a sure thing and for baby boomers working part-time, the risks of unemployment are increased. Make sure that you can financially handle the downside.
2. Have Health Care Covered. A phased retirement cannot mean phased healthcare coverage. That needs to be rock-solid and affordable. Keep in mind that many part time jobs do not include benefits. Even when health coverage is theoretically available, some group health plans require a minimum number of hours worked for eligibility. You don’t want to phase yourself right out of coverage.
3. Try to Stay in Your Field. Ideally, your phased retirement would start by staying in your present job while reducing your work hours. Moving to a different employer can add stress because of having to adjust to a new environment. That stress can really ramp up if you change careers and thereby add a steep learning curve in the process. Retirement is intended to decrease stress!
4. Know the Impact on Other Income. Working part-time after you are technically retired (e.g., collecting Social Security) can have a significant negative impact on those other benefits. Working after receiving Social Security will cause a loss of benefits prior to full retirement age. You also need to understand how your employment income and benefits will be taxed.
Final Thoughts on Phased Retirement Planning
If there is anyway possible that a baby boomer can plan for a phased retirement, I recommend it. It’s a time to test the waters and ease into a new life. If you leave your options open, you may decide to extend your working life. Or you may do just the opposite. Either way, it will be your decision, based on your own experiences.
Does anyone have a phase-out plan in place?
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