Phased retirement – a catchall term that describes a variety of part-time and reduced-hour work arrangements before leaving an employer for good – is gaining steam. But before you sign on, it’s important to understand how “phasing out” may affect your long-term finances.
Washington is leading the way. The federal government authorized the move for its own employees several years ago and began accepting applications in late 2014 from workers aged 55 and up with a desire to switch to half-time employment in exchange for receiving half their salary and annuity.
For employees with a long-term view, phased retirement can offer significant benefits, but it requires due diligence and planning. Among the advantages, phased retirement means that there doesn’t need to be a hard stop on a successful career. In fact, a 2014 study (http://newsroom.bankofamerica.com/press-releases/global-wealth-and-investment-management/merrill-lynch-study-finds-72-percent-people-o) by Merrill Lynch in partnership with Age Wave said that 72 percent of pre-retirees over the age of 50 report that their ideal retirement will include working “often in new, more flexible and fulfilling ways.” The study also noted that 47 percent of current retirees were already working or planning to work during their retirement years.
If your company is talking about phased retirement or may do so in the future, here are some key questions to consider:
What exactly do you want to phase into? For some workers, retirement really will mean a classic vision of travel and leisure leading into old age. But for others, the picture may be different. Some retirees will want to work and some retirees will have to work. Such decisions will summon a host of personal finance and tax issues based on your personal situation – read heavily and consult qualified experts before you make a decision.
What options will my employer offer over time? While the federal government is in the lead with phased retirement, most private employers are moving at a slower pace. This gives you time to plan. For example, in a 2013 benefits study, the Society for Human Resource Management noted that only 6 percent of employers had a formal phased retirement program that provided a reduced schedule and/or responsibilities prior to full retirement. Watch how your employer’s plan evolves and ask questions.
Phased or not, do you have a retirement plan in place? The decision to make a full or transitional exit from one’s employer should come after years of saving and investing both at home and at work. Years before deciding how you want to leave your career, talk to qualified retirement experts about your personal financial circumstances and what you want to do in the next phase of your life. If it’s a new career, volunteer work or full retirement, develop a plan first.
Have you talked to your senior colleagues? There’s nothing like direct advice from individuals closer to retirement to help you with your own set of pros and cons. Even if there’s no phased retirement program at your organization right now, it’s still worth talking about retirement preparation with senior colleagues willing to share what they’re doing. Also, start your own retirement planning in earnest with qualified retirement and tax experts.
How will phased retirement affect your overall benefits? If you’re working at a lower salary level at the end of your career, ask how that might affect your future retirement benefits. Make a list of all the benefits and perks you now receive as a current full-time employee and investigate how every single one could be affected by phased retirement. And if you leave the company permanently before qualifying for Medicare, know how you’ll pay for health insurance. This is a particularly important issue to discuss with a qualified financial or tax advisor.
Bottom line: Phased retirement can offer the opportunity to adjust to full-time retirement or set up a new career once you finally leave your current employer. However, before you leap, fully investigate how such a transition will affect your overall finances and future retirement benefits.
By Nathaniel Sillin
Nathaniel Sillin directs Visa’s financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney.