What Is Phased Retirement?

Quick Answer

Phased retirement allows you to gradually ease into retired life. It involves scaling back at work and letting your earned income do some of the heavy lifting for your nest egg. Making a sufficient financial plan can be a little tricky, which is why it’s usually wise to consult a financial pro.

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Retirement is a major life transition. After working for decades, it isn't always easy to flip a switch and exit the workforce. This is especially true if your work is a big part of your life. Financially speaking, retiring can also disrupt your cash flow because you'll be leaning on your nest egg to see you through the years ahead. Phased retirement can be a great way to go at your own pace. Think of it as tiptoeing into retirement.

Almost half of 60 to 75 year olds plan on working part time or picking up a side gig during retirement, according to a survey from American Advisors Group. Phased retirement may be ideal for someone who has health insurance through their employer and is too young to qualify for Medicare. Continuing to earn money can also pad your budget so you aren't so dependent on your retirement accounts for income. Some would argue that working in some capacity could be good for your mental health as well.

Phased retirement allows would-be retirees to work less and only partially tap their retirement benefits. Let's dive into how it works so you can determine if it's the right move for you.

How Do You Plan for Phased Retirement?

If a phased retirement sounds appealing, you'll need to tweak your retirement plan to make it happen.

Decide How to Structure Your Phased Retirement

As of 2019, 15% of organizations offered an informal phased retirement program, according to a survey from the Society of Human Resource Management. Only 6% of companies had a formal program in place. Contact your employer to see what your options are. It may not be out of the ordinary for older workers to cut back on hours as they get closer to fully retiring. Meanwhile, you might retain some responsibilities or shift gears into a different role within the company.

If your employer doesn't offer a formal phased retirement program, you might consider throwing the idea out there. Restructuring your role could help them save money and prepare your team to run smoothly when you eventually leave. Another option is creating your own phased retirement. You might patch together different side hustles, find a part-time job you like or become a consultant or freelancer within your industry.

Tweak Your Financial Plan

With phased retirement, you'll still have some money coming in from work. You might also have access to funds via:

  • Retirement accounts: Like a 401(k) or individual retirement accounts (IRAs)
  • Investment accounts: Such as a regular brokerage account
  • Social Security: You can begin taking Social Security at 62, but your benefit increases the longer you wait. You'll get 100% of your benefit if you wait until you've reached your full retirement age. (This is 67 for people born after 1960.) You'll get even more if you can hold out until age 70.

Phased retirement may require a more nuanced retirement income plan. How much money do you need per year to live a comfortable lifestyle? After deducting your earned income, how much will you need to pull from your nest egg to reach your goal? A financial professional can help you iron out the details—especially when it comes to your taxes. Money you withdraw from tax-deferred retirement accounts, like 401(k)s and traditional IRAs, is considered taxable income. Being strategic about your withdrawals can help reduce your tax burden.

That said, you can technically begin taking distributions from these accounts once you turn 59½, whether you're working or not. Doing so before then will likely trigger a 10% early withdrawal penalty. Be sure to plan accordingly to avoid fees and reduce the risk of outliving your money. If the numbers are tight, you might consider delaying retirement for a bit. On the other end of the spectrum, you could create an income plan that allows you to enjoy a phased retirement that lasts for years.

Who Is Phased Retirement Right For?

Phased retirement isn't for everyone, but it could be a good fit if:

  • You enjoy working and want to keep up that part of your life as you age.
  • You have a health issue that makes it difficult to work full time.
  • You like the idea of transitioning to a consultant or freelancer.
  • You want to "try on retirement" to see if you like it. A phased retirement can help you take baby steps into life as a retiree.
  • You're looking for extra money so you can rely less on your retirement accounts for income.
  • You have health insurance through your employer and are younger than 65—making you ineligible for Medicare.

Are There Disadvantages to Phased Retirement?

Phased retirement has some potential drawbacks.

  • Phased retirement could impact pension payouts. Rules vary from employer to employer. If your pension amount is based on your earnings, for example, then reducing your hours might also reduce your benefit.
  • Not every retiree can opt for phased retirement. Many employers don't offer it. Either way, some folks must continue working full time due to financial constraints.
  • You'll likely need the help of a financial professional. Phased retirement diverges from the typical course that many retirees take. For that reason, making an adequate retirement income plan may be more complicated. The process and cost of consulting a financial advisor is a potential downside.
  • It might complicate your health care expenses. Your employer may not offer health insurance to part-time employees. If you're too young for Medicare, you'll be responsible for your own health insurance costs.

The Bottom Line

Phased retirement allows you to gradually ease into retired life. It involves scaling back at work and letting your earned income do some of the heavy lifting for your nest egg. Making a sufficient financial plan can be tricky, which is why it's usually wise to consult a financial pro.

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