For many workers, the sudden change from employee to retiree can be difficult. Some employers, especially those in the public sector, have begun offering “phased retirement” plans to ease the transition. What is phased retirement? Who is eligible? And how does it all work?
We sat down with Patrick Seal, a CFS* Wealth Management Advisor at Elevations, to learn more about phased retirement, the benefits of this option and the must-know aspects.
“When I talk to members who say, I’d like to work less or not at all one day, I ask them to explain what that looks like,” Seal commented. “What if you could have your perfect world? What if you could be compensated for doing more of what you want to do and less of what you don’t want to do? I ask members what would that look like to them if there’s no fail and they say, Wow, I’ve never really thought about it that way.”
What is phased retirement? Are there benefits to deferring retirement?
Simply put, phased retirement means working less for a while before quitting the workforce altogether. This phased period might be in the final months of work or last for years. It’s up to you!
“Maybe somebody was working 40, 50, or 60 hours a week, and they’ve been in that grind mode year after year. So, they cut it down to maybe 40 or 30,” Seal explained.
Phased retirement generally allows you to continue working on what would typically be considered a part-time basis. You benefit by having a smoother transition from full-time employment to retirement, and your employer benefits by retaining the services of a talented employee. Some phased retirement plans allow you to access all or part of your pension benefit while working part-time.
“Currently, the rule with the IRS is you can turn on your Social Security benefit at age 62. However, if you earn too much money, your benefit is reduced. So, that’s one of the drawbacks. If somebody is planning on using their Social Security benefit before their full retirement age, they need to be aware that this little speed bump is out there,” Seal added.
Another advantage of delaying full retirement is that you can continue to build tax-deferred funds in your IRA or employer-sponsored retirement plan. Keep in mind, though, that you may be required to start taking minimum distributions from your qualified retirement plan or traditional IRA once you reach age 72 you want to avoid substantial penalties.
Perhaps the top benefit of phased retirement is the mental and social stimulation it provides. It’s difficult to one day stop socializing with co-workers or completing tasks that make a person feel valuable, respected and needed.
Seal explains that folks who chose phased retirement “don’t get disconnected or isolated. It’s been proven through so many studies that isolation is a very damaging component to people’s mental health and their capacity to continue physically.” Working in a limited capacity can be good for the wallet and the mind.
Who is a good candidate for phased retirement?
Every person and the way they work is unique. Whether you’re an employee or self-employed, phased retirement is an option for you. Older folks who want to open up time in their calendar to travel more, visit with family or simply pursue hobbies are often the ones considering this option.
If you’re an employee, you’ll need to talk with your employer about how you could work less in the years leading up to retirement and how you will structure your phased retirement. Would your days be shorter? Would you work fewer days each week? Would you become a seasonal employee and only work for certain months?
Seal added, “Some jobs are task-oriented or project-oriented. Once you’re finished with the project, if you don’t jump in on the next project, you’re not obligated to be there.”
It’s not uncommon for phased retirees to end their employment in their long-time career field to work their last few years at a part-time job that aligns with other interests simply to enjoy a change of pace in life or learn a new skill.
If you are self-employed, look closely at your business plan. Can you afford to scale back on your working hours and still be financially sound? If you purchase your benefits on your own, including dental and medical insurance, they will still be available to you as long as you pay the premiums.
Are there any drawbacks to phased retirement?
The first questions for many people center around income and whether or not they can afford phased retirement. Of course, to the extent you can support yourself with a reduced salary, other streams of income and your liquid savings account, the less you’ll need to dip into your retirement savings.
Each worker’s investment strategy is unique. Whether you have an employer or are self-employed, it’s best to visit with a financial advisor to take an expert look at what you have set up and assist with refining your plan to align with your retirement goals. Then, revisit the plan in a few years because dreams often shift and change as life moves forward.
If you do continue to work, make sure you understand the consequences. Some pension plans base your retirement benefit on your final average pay. If you work part-time, your pension benefit may be reduced because your pay has decreased. Remember, too, that income from a job may affect the amount of Social Security retirement benefit you receive if you are under average retirement age. However, once you reach the current retirement age (which changes periodically), you can earn as much as you want without affecting your Social Security retirement benefit.
“If you plan to supplement household income with early Social Security benefits, you need to be careful about that. I recommend speaking with a Financial Advisor to know the rules so that you’re not caught off guard,” Seal noted.
He’s happy to use Elevations’ sophisticated financial planning software to map out a future roadmap for success and account for inflation, life events, and how changes to current investment portioning or rates would affect the overall picture.
“It considers a thousand different dynamics, and it gives you a success rate of probability,” Seal laughed as he admitted it is simply too much for the average person to try to calculate on paper.
The CFS* Financial Advisors at Elevations Credit Union are always available to help you navigate these important considerations and decisions. Please give us a call at 303-443-4672 x2240 to set up a complimentary, no-obligation appointment. You’ve spent a lifetime accumulating your retirement assets, and now it’s time to put them to work. Let us help you make sure that everything is in place and your retirement plan is functioning for you.