Everything You Need to Know About Phased Retirement, Including Whether or Not It's Right for You

Financial experts weigh in.

If you're approaching your 60s, you may be starting to think about retirement. After all, you're eligible to pull from your 401(k) without penalty from age 59.5 on, and you can begin to receive social security benefits as early as 62 years of age. Unfortunately, though, studies suggest the majority of Americans—at least 55 percent—are not adequately prepared for retirement and are in danger of not being able to fully cover estimated essential expenses like housing, healthcare, and food during their retirement years. That may account for why the age of retirement is rising so steadily. According to studies, the average retirement age has increased by about three years over the last three decades, to 64.6 for men and 62.3 for women.

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But no matter how much you love your job, nobody wants to work forever. And there may be a solution to help people retire more comfortably when they want to—it's called phased retirement, and it's pretty much exactly what it sounds like it might be. "A phased retirement is one where the individual slows down gradually over a longer period of time, versus a hard stop on a predetermined date," explains Brian Halbert, AIF, vice president of retirement services at Pensionmark. "For example, a phased retirement could start by going from 40 hours worked per week to 32 hours worked per week for a three-month period. Followed by a three-month period of 24 hours worked per week. This would continue until zero hours worked."

If this sounds like a plan that's right for you, here's what you need to know in terms of the benefits and possible downsides.

The Benefits

Approaching retirement this way has many benefits for the employee, including the opportunity for better financial planning. A lot goes into a successful retirement, and a phased retirement affords you the opportunity to monitor your finances and readjust your budget as you slowly transition away from a full-time job. "Working on a lesser scale can still produce enough income to at least cover everyday expenses," says Anjali Singh, CFP and financial advisor with Pacific Advisors in Petaluma, California. "Even a few years of this approach can add up to a meaningful swing in the longevity of someone's nest egg."

Additionally, you can begin to shop around for health insurance, one of the more expensive but essential costs you'll face during retirement—especially if you're retiring early. "Health insurance before Medicare begins is expensive," says Patti B. Black, a certified financial planner in Birmingham, Alabama. "Continuing on group health insurance or working part-time may help offset that cost, which can help boost your chances of a financially successful retirement."

Phased retirement also gives you time to learn what you're retiring to do, not just what you are retiring from, says Black. "Spend time thinking about your purpose in retirement. Who are you, and what are you going to be doing now that you're not working? Playing golf is not a purpose!" Use some of your newfound time to check out volunteer groups, clubs, and classes that interest you.

This approach to retirement can also be advantageous to employers, since it allows them to retain experienced staff for a longer period of time. And, during the transition, these individuals can train new workers for a more seamless transition.

The Downsides

But, as with anything else, there are also some drawbacks to be aware of, namely the fact that, in some companies, when employees opt for this program, they lose access to employer-provided healthcare or even pensions as a result of reduced working hours. Also, for some, more flexible hours may make it difficult to work efficiently. "The reality is, a lot of people aren't looking to fully 'retire,'" says Singh. "They still enjoy the challenge or intellectual stimulation their job provides, but they are looking for some additional autonomy to pursue other interests they've been putting on hold for a long time." And, fortunately, this is an endeavor more and more companies are embracing.

How to Decide If It's Right for You

So, how do you know if phased retirement is right for you? "Giving up on such a big part of one's life, their career, is a very big step that is full of unknowns, as much as someone tries to anticipate every detail," says Singh. "Like any big life decision or commitment, it often makes sense to test out the waters before fully diving in and exploring a new shore."

Even if you're just dipping your toe in the water, make sure to talk to your HR department, as well as an independent financial expert. These individuals will help make sure you cover all of your bases. Your HR department will make you aware of any changes to your pay or benefits, while a financial expert can help you look at your overall financial wellness to determine whether you are ready to begin the retirement process in any capacity.

If the finances all check out, think about your lifestyle and what kind of person you are, suggests Joe Flanagan, senior employment advisor at VelvetJobs. "For some phased retirement could be an escape, for others, it could be imprisonment," he explains. Some might find it cathartic to train the coming person, whereas for others, working every day, even if in a reduced capacity, could be an unsettling reminder. "Ask yourself whether you are excited to retire, if you have planned for the future, and are looking forward to owning your time. If not, it might be a good idea to go for a phased retirement in order to plan better."

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