What Is Phased Retirement?
A phased retirement includes a broad range of employment arrangements that allow an employee who is approaching retirement age to continue working with a reduced workload, and eventually transition from full-time work to full-time retirement. Phased retirement may include a pre-retirement, gradual reduction in hours (or days) of work, then post-retirement, part-time work for pensioners who wish to remain employed. Part-time, seasonal, and temporary work or job-sharing are all work arrangements that can be a form of phased retirement.
- Phased retirement is exactly what it sounds like—a retirement plan that eases an employee from the workforce.
- Phasing into retirement keeps an income stream during the transition.
- Some feel that retirement phasing is easier to deal with psychologically compared to quitting work entirely.
- There are IRS limits on the amount of income an individual can earn before impacting their benefit amount.
Understanding Phased Retirement
The nature of retirement is changing, and many workers do not wish to experience a sudden end to work, followed by the equally sudden onset of full-time retirement. Instead, they wish to ease into retirement, transitioning out of the workforce with a reduced workload.
Phased retirement is seen as a benefit by many older workers, as it allows them to gradually ease into retirement while maintaining a higher income than they would receive if they quit work entirely. From the employers' point of view, phased retirement programs can be used to retain skilled older employees who would otherwise retire (especially in sectors where there is a shortage of entry-level job applicants), to reduce labor costs, or to arrange for the training of replacement employees by older workers.
Retirement in the 21st Century
A 2016 study from the TransAmerica Center for Retirement Studies found that nearly three-quarters of employers polled at 1,800 companies of all sizes reported that many of their employees expect to work past age 65 or do not plan to retire at all. While four of the five companies surveyed said they plan to support senior employees who want to continue working, just four in 10 of the firms offer flexible schedules. Fewer than a third allow workers to transition from full-time to part-time work or to a less demanding position.
"Phased retirement has no succinct definition," AARP noted in a white paper on the subject. "The term phased retirement often refers to a broad range of flexible retirement arrangements, both informal practices, and formal workplace policies, which allow employees are approaching normal retirement age to reduce the hours worked or work for their employers in a different capacity after retirement."
The AARP report cited these factors that are pushing workers to retire later:
Changes in Social Security have made it easier for recipients to continue working after reaching full retirement age without losing their benefits; Americans are living longer, which means that retirees will need greater financial resources to support themselves.
In 2020, Social Security allows for $18,240 of earned income per individual under the full retirement age before affecting social security benefits for those who have not reached their full retirement age. The limit for 2021 increases to $18,960. Note the limit increases in the year in which you attain your full retirement age.
Phased retirement arrangements help businesses "maintain continuity of essential business operations by retaining key workers whose positions may be difficult to fill; enhance productivity by addressing the need for work-life balance; and reduce costs associated with hiring and training new employees."