Is Phased Retirement Right for You?

Senior businesswoman getting out of a car talking on phone.
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Transitioning from working full-time to retiring can be jarring on both an emotional and financial level, so some individuals are opting for a “phased retirement” instead.

According to the Society for Human Resource Management, phased retirement allows older employees to reduce work hours gradually, enabling them to slowly transition into retirement rather than departing abruptly from the workforce. In addition to reducing work hours overtime, phased retirement programs include initiating a partial drawdown of funds from retirement plans.

Depending on your specific situation and retirement goals, you may want to consider a phased retirement approach instead of leaving the workforce cold turkey. Here are a few signs that a phased retirement could be right for you.

You Don’t Have a Clear Picture of What You Want Retirement To Look Like

“We highly recommend a phased retirement for most clients,” said Chris Hardy, CFP, managing director at Paramount Tax and Accounting. “At the initial meeting with clients, one of the first questions we ask is if they are retiring to an ideal future or retiring from an undesired situation. Most do not have a clear vision of what they want retirement to look like and what they want to be doing — they just are tired of the monotony of what they experienced in their later years of a career.”

Are You Retirement Ready?

Opting for a phased retirement will give you more time to figure out what you want your golden years to look like.

“A phased retirement gives someone more time to explore outside hobbies, traveling or volunteering at a slower pace and start to get their head and habits prepared for a full retirement,” said Michele Francisco, CFP, partner and chief client officer at RMB Capital in Chicago.

You Aren’t Ready To Tap Into Your Nest Egg

“In the current market environment, we are seeing more employers offer a transitioned path to retirement that includes a reduced time commitment or a consulting position that is project-based. This allows for the person to start checking off the big trips and or purchases they had planned early on in retirement without worrying about the impact on their nest egg,” Hardy said.

With income still coming in, you can hold onto much of your retirement savings until you’re ready to fully retire.

You Love Your Job

“Retirement isn’t for everyone,” said Chet Schwartz, a financial representative with Strategies for Wealth, located in New York City. “Some people absolutely love what they do and it defines who they are. They still enjoy the challenge or intellectual stimulation their job provides, but they are looking for some additional autonomy to pursue other interests they’ve been putting on hold for a long time. Phasing into retirement can provide the best of both worlds, where their ‘gray matter’ continues to be fed with new challenges and purpose, while providing additional free time to pursue other interests while still physically fit to do so.”

Are You Retirement Ready?

You’re Behind in Retirement Savings

If your retirement nest egg isn’t where it should be when you reach the age you planned to retire, a phased retirement would make financial sense.

“Working part-time in retirement would obviously add income,” said Anjali Singh, CFP. “Those who had financial setbacks or were unable to save for a full retirement could find the strategy helpful, or in some cases necessary. For those who have Roth IRAs, the extra income could allow them to defer drawing from those accounts. By allowing Roths to continue to grow versus withdrawing from them, it could add stability and increase overall cash flow in retirement.”

You Want To Ease Into Your New Lifestyle

If you’ll have less monthly income once you are fully retired, you may want to ease into your new budget and lifestyle.

“A sudden or surprise retirement can create incredible financial stress on top of all the emotional issues triggered by the change,” said Paul Tyler, CMO at Nassau Financial Group and host of “That Annuity Show” podcast. “A phased retirement can potentially allow an individual time to adjust what they can control — their lifestyle and associated expenses — to fit within their new budget. A stepped approach can give them time to make needed adjustments to their expenses on a timeframe that makes personal and financial sense.”

Are You Retirement Ready?

You Need Time To Explore Your Financial Options

Perhaps you haven’t figured out your financial plan for retirement. A phased approach gives you more time to research your options or meet with a professional to come up with a plan that works for you.

“It can give them time to really understand all retirement funding options they may not understand — like fixed annuities for savings and for guaranteed income,” Tyler said.

You Want To Max Out Your Social Security Benefits

If you continue to receive income from part-time work, you may be able to delay taking Social Security, which can really pay off in the long run.

“If you file for Social Security benefits before your full retirement age, your benefit will be reduced as much as 6.7% annually, depending on when you claim,” said Philip Herzberg, lead financial advisor at Team Hewins. “You can substantially boost your lifetime benefit income by delaying the claiming of Social Security benefits until age 70. There is a large increase of 8% for every 12 months of delay from full retirement age up to age 70, which is a much higher guaranteed return than you may get in any financial instrument. Plus, benefits are adjusted annually for inflation. Even a delay of a year or two past the full retirement age can meaningfully increase benefits and minimize the risk of part-time employees falling short of income in retirement.”

Are You Retirement Ready?

You Want To Maximize Your Pension

“For those with a defined benefit pension, working longer may provide more years of service and an increase in monthly benefits,” said Joe Buhrmann, CFP, senior financial planning consultant at eMoney Advisor.

This can enable you to live a more desirable lifestyle when you fully retire.

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