Many Americans envision a set retirement date when they abruptly stop work and start to enjoy the fruits of their hard work. However, a growing chorus of workers strives to balance work and leisure and slowly transition into full retirement. Phased retirement plays a vital role in these ambitions by supporting workers as they seek to leave the workforce.
Let’s look at the concept of phased retirement and how you can use it to maximize your retirement assets.
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What Is Phased Retirement?
Phased retirement is the process of gradually exiting the workforce. For example, you might scale back to part-time hours while still earning a paycheck and keeping your benefits in place. While the industry has been slow to adopt phased retirement, recent labor shortages could prompt many to reconsider their options to keep talent around.
There are several reasons to consider a phased retirement:
- You can earn enough to avoid taking early Social Security.
- You can keep health insurance before Medicare kicks in.
- You can maintain work-based social networks with less stress.
Employers also benefit from these arrangements:
- They struggle less with labor shortages.
- They have more time to transfer knowledge.
- The process is a lot smoother for both parties.
According to the Transamerica Center, more than 60% of workers in the U.S. envision a flexible transition to retirement. However, only 25% of workers over 55 years old said their employers offer the opportunity. The AARP suggests that employers are hesitant to adopt these policies due to regulatory concerns and worries that too many will retire early.
How To Use Phased Retirement?
Many companies have turned to phased retirement to address recent labor shortages. For example, Herman Miller Inc., a furniture manufacturer, offers a flex retirement plan that reduces hours for six months to two years in exchange for a commitment to teach replacements and ensure a smooth transition of knowledge.
If your employer doesn’t offer a phased retirement plan, you can still talk to them about a mutually beneficial ad-hoc arrangement. Many employers prefer to keep experienced employees around and may be especially willing to entertain the idea if you mentor a replacement. Your odds are acutely higher if you have unique skill sets.
If your employer is open to phased retirement, the next step is carefully planning your salary and benefit requirements. For example, if you want to retire before 65, you may want to ensure that your employer will provide health insurance until you’re eligible for Medicare. Private health insurance between the ages of 60 and 65 can be a considerable expense.
You should also ensure that your part-time salary is sufficient to cover your expenses. If you can, defer taking Social Security until after 65 to maximize your benefits. You should also consider the tax implications of your part-time earnings since they could impact the amount of tax you owe on income from your other retirement sources.
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The Bottom Line
Phased retirement is an excellent way to ease into retirement and avoid the pitfalls of private health insurance and early Social Security withdrawals for those retiring before age 65. In addition, it can help maintain your work-based social networks and ease a transition that takes many new retirees by surprise.
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