How Phased Retirement Works? Is it Right for You?

When you think about retirement, there’s more than one path you can take. Phased retirement allows you to gradually ease out of your job, helping you transition smoothly into life after retirement. You no longer have to leave your job abruptly but plan out your retirement phase over time. This means more control over the retirement process and having enough time to decide how you want your retirement to look.

The way people are approaching retirement today is different from decades ago. In earlier years, retirement was seen as a natural way of stopping to work when you reached a certain age. Most people would also retire early when they cannot perform their jobs or duties any longer as required. For most people, this would happen when they reached the age of 65. This is the age that was traditionally accepted to leave the job and start living off your pension.

Over time, pensions started to become less common. However, most people are now hopeful they will live past 90 and their view of retirement has changed. At the onset of the pandemic, the workplace became more dynamic and people started pursuing greater flexibility in their lifestyles. With these changes, phased retirement started to grow in popularity.

As the name suggests, the worker enters into a flexible arrangement with the employer to slowly leave their job. This may include a gradual reduction in the amount of work until they fully leave their employment. Instead of waiting for a final day at work when they retire, the employee first gets into lighter duties or part-time schedules and eventually leaves employment altogether. This may entail:

Working Part Time: Flexible work hours to reduce job stress while maintaining engagement in a professional field.

Freelancing for Clients: A more flexible approach, offering more control in work when the employer does not offer an official phased retirement program.

Taking on Seasonal Work: Partial retiree often enjoys seasonal work as it allows them to enjoy their extended time off periods.

Starting Your Own Business: Turning a passion into a profitable venture and using this as a vehicle to officially leave employment.

Becoming a Consultant: Leveraging your experience to become a consultant in your area of expertise.

With these options, phased retirement brings a set of benefits that cater to the needs of different kinds of people. It also sets a path for partial income, especially before withdrawing from your retirement account.

Other benefits include:

Greater financial security than the traditional way of retiring;

Testing out post-work life in a relaxed manner;

Posting Social Security enrollment;

Extending health benefits from your employer;

Easing into retirement without having to wait for the final day at work;

An opportunity to leverage employer programs around phased retirement.

As you plan for phased retirement, consider the drawbacks as well. For instance, you may lose certain benefits such as paid leave and health insurance when you start working part-time. Certain life insurance policies and pension plans could also lower your payments to reflect the lower average salary in your last years of employment. Again, you will still be working during those last years and there are some things you will still not like about your job such as waking up early, interacting with certain people, and commuting.

While phased retirement is beneficial in many ways, it may not always appeal to everyone. Some of the specifics may seem complicated or unrealistic to some. Factors such as your own preferences can help in determining whether this is the right decision for you.

You can choose phased retirement if you:

Want to find and train someone to succeed you in your position;

Enjoy your work and want to keep it as part of your life;

Like the idea of consulting or becoming a freelance in your areas of expertise;

Are concerned about the current market volatility, but want to continue working until your retirement income becomes sustainable;

Have a disability or health issue limiting your ability to work full-time;

Just want to test retirement life before going full swing;

Are looking for additional sources of income to avoid withdrawing from retirement accounts or Social Security.

A phased retirement agreement can be complicated, especially when considering many factors. To make sure you do it right, start by setting a timeline. Then determine what you consider a sustainable withdrawal rate from your Social Security and retirement account. Think of the options offered by your employer and decide the route you want to take towards your retirement.