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Phased Retirement: What You Need to Know

A gradual transition to retirement may sound enticing, but be sure you understand the drawbacks

By Richard Eisenberg

The concept of a “phased retirement” sounds pretty appealing.


Instead of working at your job one day then abruptly leaving it forever the next, you make the transition into retirement more gradually. With phased retirement, you and your employer make an arrangement that allows you to cut back your hours or switch to a flexible schedule for a few years before your employment ultimately comes to an end.


The Benefits of Phased Retirement


What you get out of phased retirement: a chance to test the retirement waters, to earn a pro-rated income that you’d forgo by leaving the job, and to spend more time pursuing passions — volunteering, taking classes, spending time with your family, traveling, engaging in hobbies and other pursuits and destressing.


What your employer gets out of it: an opportunity to keep a seasoned, talented employee around longer and time to find an eventual replacement whom you’ll train. SmartMoney says the Scripps hospital chain’s “staged retirement” program lets the company retain its best doctors, nurses, executives and pharmacists and save money, too.



Even Congress is taking a look at phased retirement — not for its own members, but for federal workers in general. The Senate recently passed a bill that would let retirement-eligible federal employees work part-time while receiving retirement annuity payments.

But the truth is, few employers offer formal phased retirement programs. A new survey by the Society for Human Resource Management and AARP of 430 human resources professionals found that just 8 percent of employers provide opportunities for older workers to transfer to jobs with reduced pay and responsibilities; 3 percent have established alternative career tracks for older workers.


The Other Side of the Coin


Aside from its advantages, phased retirement also has some potential drawbacks that could slice your other employee benefits and your Social Security checks:

  • Phased retirement could reduce your pension.  If you work for an employer that offers a defined benefit pension plan (the kind that guarantees monthly payouts), the plan’s formula may penalize you for taking phased retirement. These pensions often base their payments on your average salary during your final years at the employer.
  • Phased retirement could halt your 401(k) contributions. Your employer might not let you continue participating in its retirement savings plan if you cut back to part-time work.
  • Phased retirement could make you lose your health care coverage or pay more for it. Many employers don’t offer health care to part-time employees or charge these workers higher premiums than full-time employees. So if you begin phased retirement before Medicare kicks in at age 65, you might find yourself uninsured and facing steep out-of-pocket health costs.
  • Phased retirement could mean smaller life insurance benefits for your spouse. Often, the size of employer-sponsored life insurance death benefits is a multiple of your salary. By cutting your pay, you could also be cutting the insurance payout.
  • Phased retirement could reduce your Social Security payments. Your Social Security benefits are determined by your average earnings during your 35 highest-income years. Money says that if your phased retirement’s reduced salary means you will need to start collecting Social Security before the program's full retirement age (now between 66 and 67), you’ll see your benefits cut by as much as 30 percent.

How to Arrange a Phased Retirement



Now that you know the pros and cons, does phased retirement still seem worth pursuing? If so, determine whether you can pull it off financially. Estimate whether you’d have enough income and savings to pay your bills and have cash for emergencies, too.


If you think you can swing it, the next step is to check with Human Resources to see whether your employer offers phased retirement as a formal program. (Odds are it doesn’t, though quite a few colleges do.) If phased retirement is an employee benefit, find out what effect taking it would have on your other benefits, so you can decide whether the switch makes sense.


If your employer doesn’t offer phased retirement officially, you may need to persuade your boss to let you do it.


Set up a meeting with your boss to explain the advantages for your employer. The list might include: Your phased retirement would eliminate the need to find a full-time replacement immediately; you’ll be able to transfer your knowledge to the person who’ll ultimately take over for you; and your reduced salary could save your employer money.


During the meeting, present what Smith-Proulx calls a “tactical strategy.” In other words, come with a well-thought-out written plan that lays everything out: how many hours you’ll work for how many years, how all work will still get done, how often you’ll be in the office, how you’ll juggle telecommuting with attending meetings, how often you’ll provide status reports, and how you’ll continue meeting deadlines.


If you encounter resistance, ask if you could move over to a different position. Maybe your new part-time role could be mentoring new employees.


Assuming you’re able to get your boss to greenlight a phased retirement, proceed with caution. If your employer has a Human Resources department, tell your boss that you need to talk with HR to determine what effect the switch would have on your benefits. Then go back to HR before deciding whether to go through with it. If there is no HR department, you'll need to add the benefits angle to your tactical discussion with your boss.

Photograph of Richard Eisenberg
Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of "How to Avoid a Mid-Life Financial Crisis" and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Read More
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