Retirement Planners: 9 Key Signs That a Phased Retirement Is Right for You
Written by
Jordan Rosenfeld
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Chris Cluff
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When you think of retirement, if you think of just having an end date to working you might be surprised to learn that some people retire in stages, known as a “phased” retirement.
In many cases, this can look like gradually reducing work hours before full retirement age and slowly beginning to draw upon partial Social Security benefits instead of just retiring altogether at full retirement age.
Experts explain how to know if a phased retirement is right for you.
You Have Healthcare Dialed In
A critical component of phased retirement is understanding and planning for healthcare costs, according to Marty Burbank, owner of OC Elder Law.
“Many of my clients were surprised to find out how substantial these can become in later life. Through Medi-Cal planning and exploring veterans’ benefits for those eligible, we’ve been able to secure additional financial support mechanisms that significantly ease the transition,” said Burbank.
Les Perlson, an experienced partner with National Plan Administrators, said one approach he has seen work effectively for individuals considering phased retirement is transitioning from traditional employer-provided health insurance to a self-funded plan, which can offer both flexibility and cost savings.
He said, “These savings can then be redirected towards their retirement fund, enhancing their financial readiness.”
You Have a Comprehensive Plan
The key takeaway from these experiences is the importance of early and comprehensive planning.
“Starting the conversation about phased retirement five to 10 years before the intended start date allows for more options and flexibility in planning, ensuring a smoother transition into retirement life that includes fulfilling activities and financial stability,” said Burbank.
You’re Financially Prepared
One of the primary indicators that you can handle a phased retirement is your financial preparedness, according to Abid Salahi, co-founder of FinlyWealth.
“If you have diligently saved and invested over the years, you may be able to gradually reduce your working hours while supplementing your income with Social Security benefits and retirement account withdrawals. This approach allows you to ease into retirement while maintaining a steady cash flow,” said Salahi.
He shared that according to a recent study by the Employee Benefit Research Institute, a staggering 49% of American workers are at risk of running out of money in retirement.
“However, for those who have built substantial retirement savings, a phased retirement can be a prudent strategy to extend the longevity of their nest egg,” said Salahi.
You Want Better Work-Life Balance
Another crucial factor in preparedness is your overall health and well-being.
“If you find the demands of a full-time job increasingly overwhelming, a phased retirement can alleviate stress and provide a better work-life balance. This transition can particularly benefit individuals in physically demanding professions or those experiencing burnout,” said Salahi.
He explained that one of his clients, a 62-year-old construction manager, opted for a phased retirement plan.
“By reducing his workload to part-time while receiving partial Social Security benefits, he could maintain financial stability while prioritizing his health and enjoying leisure time,” said Salahi.
You Have an Investment Strategy
For individuals considering phased retirement, it’s crucial to recalibrate your investment strategy to accommodate a potentially longer period of lower earnings before full retirement, according to David Blain, CEO of BlueSky Wealth Advisors.
“For example, we’ve advised clients to adjust their portfolio to a more conservative allocation as they enter into phased retirement, ensuring a stable income flow while capitalizing on growth opportunities to counteract inflation and longevity risks. This adjustment enhances the sustainability of their assets throughout the phased retirement period,” said Blain.
You Utilize Your Retirement Accounts Effectively
Furthermore, engaging in deliberate tax planning significantly impacts the effectiveness of a phased retirement strategy.
“For instance, by capitalizing on years with lower income due to reduced work hours, one might find opportunities for strategic Roth conversions or realizing capital gains at a lower tax rate. These maneuvers can optimize your financial situation for both the present reduced income phase and the future fully retired phase, ensuring a smoother financial transition,” said Blain.
You’ve Planned Ahead
Perlson said it’s imperative to start a review and transition for a phased retirement early–ideally several years before you begin reducing your work hours.
“This foresight allows for adjustments in coverage and budgeting to align with your evolving needs, ensuring a smooth and financially secure move into phased retirement. Through experiences like these, where strategic planning meets flexible insurance solutions, phased retirement becomes a financially prudent decision,” said Perlson.
You Have A Good Handle on Cash Flow
John F. Pace, CPA and partner with Pace & Associates said that effective phased retirement planning involves keenly focusing on cash flow management.
“For many of my clients, transitioning to part-time work substantially reduces their cash flow. By assisting them in revising their budget to accommodate this shift, while also reevaluating their investment strategies to ensure a steady flow of passive income, we’ve been able to help them maintain their lifestyle without dipping too deeply into their principal retirement savings,” said Pace.
This adjustment typically requires a deep dive into one’s current expenditures, potential sources of income and the tax implications of each.
You’ve Considered Your Emotional Attitude
“Finally, a critical element often overlooked in phased retirement planning is the emotional and psychological adjustment to a changed professional identity and lifestyle,” said Pace. “From my interactions with clients, it’s clear that gradual retirement can be as much a psychological transition as a financial one.”
He’s found that encouraging clients to invest time in hobbies, volunteer work or part-time consulting in their field of expertise hasn’t only provided them with a sense of purpose and fulfillment, it helps ease the financial burden of retirement by generating additional income.
“This holistic approach, encompassing financial, tax, and personal considerations, has proven essential in navigating the complexities of phased retirement successfully,” said Pace.
Like most solid retirement plans, careful planning and consulting with a financial advisor are your best bets to achieve a phased retirement.
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