As baby boomers hit retirement age, many are realizing they're
not quite ready to quit work cold turkey. Whether you're worried
about the size of your nest egg, leaving unfinished projects at the
office or simply filling up the hours of the day, an abrupt shift
from corner office to golf course can seem a daunting
Such concerns are leading more and more boomers to blur the
traditionally sharp boundaries between work and retirement. With
help from employers, they're seeking out "phased retirement"
arrangements that allow them to scale back their working hours and
explore other interests while maintaining workplace benefits and
giving their savings more time to grow.
Many older workers want "a gentler transition into something we
all know is a major lifestyle change," says Paula Sanders, vice
provost for academic affairs at Rice University, in Houston. The
university this year instituted a phased retirement program for
There's no strict definition of phased retirement, and many
employers strike these arrangements with workers one-on-one rather
than setting up formal programs. That's changing. The federal
government is currently developing a phased retirement program for
its workers. More than half of employers surveyed by the Families
and Work Institute last year allow at least some employees to work
reduced hours over a period before full retirement. And 36% of
employers surveyed by consulting firm Aon Hewitt said they're
likely to evaluate phased retirement programs this year, up from
30% in 2012.
For employers, phased retirement programs can help retain
skilled, experienced workers who might otherwise opt for full
retirement. It also provides time for those workers to mentor
younger employees. And phased retirement can be ideal for employees
looking to stay engaged with the working world and boost retirement
savings while also freeing up time for caregiving, volunteer work,
travel and other pursuits.
But before you strike a deal with your employer, there are a
host of factors to consider. You'll want to ensure that you can
afford a reduction in your paycheck, that your hours and
responsibilities will be scaled back in a way that matches your
reduced compensation, and that you understand how your pension and
other workplace benefits will be affected.
Phased retirement programs have been around for years, and they
were growing in popularity until the financial crisis dampened both
employers' and employees' enthusiasm for the arrangements. But the
programs are again on the rise as companies see a retirement wave
on the horizon and as older workers anticipating ever-greater
longevity find that they're able to stay productive longer. As the
economy picks up, more employers are likely to embrace the programs
because they're "thinking harder about what they can do to keep
people around," says Bob Leone, senior partner in the retirement
practice at Aon Hewitt. "They'll need to get creative in order to
David Drees, 59, of Columbus, Ohio, is one worker eager to have
the option of phasing into retirement. A contract specialist for
the Defense Logistics Agency, Drees says he was excited to hear
about the federal government's plans to offer a phased retirement
program. "Easing into retirement, I could do three days a week or
two days a week and be off the rest of the time and get used to
that," he says. With the extra free time, he says, he might
volunteer, take courses at a local college and get away for long
weekends with his wife.
As you explore your phased retirement options, you will need to
answer the following questions.
Rigid rules or flexible design?
Before raising your hand for phased retirement, consider whether
your employer will be dictating your schedule and responsibilities
or whether you have some ability to design your own phaseout
plan--and change your mind along the way. The flexibility of phased
retirement programs and workers' ability to negotiate the terms of
these arrangements vary widely from one employer to the next.
Intuitive Research and Technology Corp., in Huntsville, Ala.,
for example, is focused on retaining experienced workers with the
specialized skills needed for the engineering and analytical
contracting it provides to Defense Department customers--and that
means offering all sorts of flexible work schedules, says Juanita
Phillips, director of human resources. About 7% to 8% of the
workforce is in some sort of phased retirement program, she says.
Some of these workers sign on for specific projects, while others
may work many hours for a few weeks and then be off for nine
months. And the phased retirement arrangements are open-ended, with
no required retirement date.
Faculty entering Rice's new phased retirement program, however,
sign an irrevocable agreement and follow a set schedule that leads
to full retirement in one to three years. Participants take on 50%
of a full-time workload, receiving 80% of salary in the first year,
70% in the second and 50% in the third. Once in the program,
faculty can fully retire sooner than the contract dictates, but
they can't extend the phaseout period, says Sanders, the vice
Phased retirement programs may also require participants to take
on new responsibilities--usually focused on transferring skills to
the next generation of workers. Under regulations proposed this
summer by the Office of Personnel Management for the federal
government phased retirement program, participants will work
half-time and spend at least 20% of their working hours mentoring
Can you afford to phase out?
Taking a pay cut in exchange for some extra free time may seem
frightening for workers in their late fifties or sixties. But a
variety of approaches can make phased retirement affordable and
bring long-term benefits to your nest egg.
Using a concept it calls "practice retirement," for example, T.
Rowe Price suggests that preretirees consider easing into
retirement by halting retirement-plan contributions and delaying
Social Security while continuing to work at least part time.
An example from T. Rowe Price shows how a couple practicing
retirement can benefit financially by choosing an extended phased
retirement over working full time until normal retirement age. A
60-year-old couple has $500,000 in retirement savings and income of
$100,000, and they've been saving 15% of salary in their 401(k)
plans. They both want to enjoy their sixties and would like to
fully retire soon--but they're also willing to consider
One option: They stop retirement-plan contributions at age 62
but work full time until age 66. During those four years, they
could use the extra money to travel or engage in other
retirement-type pursuits. At 66, they claim Social Security and
start drawing roughly 4% from their retirement accounts. This would
give them annual retirement income of $67,900 and a savings balance
at retirement of $665,400.
If they instead pursue a phased retirement, by stopping
retirement-plan contributions at age 62, working part time from age
62 to 70 and claiming Social Security at age 70, they see multiple
benefits. Although their salary is reduced, the fact that they've
stopped contributions gives them some extra money to play with.
Because their Social Security benefits grow each year that they
delay claiming, and they avoid tapping their savings for an
additional four years, their annual retirement income jumps to
$89,000. What's more, their savings at full retirement total
$775,000--16% more than if they had both fully retired at 66.
Will your pension or 401(k) be affected?
Rule changes in recent years have helped pave the way for phased
retirement. The Pension Protection Act of 2006 allowed pension
plans to pay benefits to active workers who are 62 or older. While
receiving a portion of your pension can help supplement your income
as you cut back your hours, participant advocates raise concerns
about how phased retirement may affect pension benefits and
long-term retirement security.
If you start drawing benefits early, your pension annuity may be
substantially reduced, and "how is that going to affect people
later in life when they're 75 and their retirement benefits are
lower?" asks Norman Stein, law professor at Drexel University. And
in some pension plans, your benefit is based on your average pay in
your final working years--so working part time during those years
could slash your benefit.
No matter how your plan is structured, make sure you understand
phased retirement's potential impact on your lifetime income. Ask
about any partial pension you may be eligible for now and what that
means in terms of your full pension when you ultimately retire,
says Sara Rix, senior strategic policy adviser at AARP's Public
Depending on plan rules, participants in 401(k) plans may be
able to tap these savings after age 59 1/2 without penalty, even if
they're still working. You'll do your nest egg a favor, of course,
if you leave these funds untouched. And if you decide to scale back
retirement-plan contributions, perhaps using some of that cash to
pay down debt or pursue other interests, don't leave free money on
the table. Contribute enough to the 401(k) to get the employer
matching contribution. However, rules vary from plan to plan, so
ask whether scaling back your hours may affect your eligibility for
the matching contribution.
What's the impact on Social Security?
Carefully consider whether Social Security benefits should help
supplement your income as your paycheck shrinks. Although you'll
maximize your benefit if you delay claiming until age 70, many
people find that claiming earlier gives them the breathing room
they need to pursue a more flexible work schedule.
In the past couple of years, Peter Sarver, 67, a housing program
manager in Syracuse, N.Y., has reduced his work schedule from the
traditional 40 hours a week to 80% and then 60% of full time. He
claimed Social Security at age 65. "Frankly that did give me the
flexibility to be more playful with my work commitments," he says.
"The Social Security made a huge difference."
For married couples, "maybe the higher income earner could put
off Social Security as long as possible, and the lower income
earner could have the flexibility to take Social Security benefits"
earlier, says Judith Ward, a senior financial planner at T. Rowe
Price. "That's a compromise to consider."
If you claim Social Security before your normal retirement age
(66 for those born between 1943 and 1954), and your earnings are
above a certain level, a portion of your benefit will be withheld.
For people subject to this "earnings test," Social Security in 2013
will withhold $1 in benefits for every $2 you earn above $15,120
A Paycheck's Impact on Retirement Income
). Also remember that Social Security calculates your benefit based
on your 35 highest-earning years--so a pay cut during your phased
retirement period could affect your benefit.
Can you still get workplace benefits?
Before reducing your hours, ask whether the move will have an
impact on your employer-provided health coverage. Intuitive
Research, for example, only pays for health coverage if an employee
works more than 30 hours per week, Phillips says. At Rice, however,
phased retirees remain fully eligible for health coverage.
Under the new health care overhaul law, larger employers in 2015
must cover employees who work 30 or more hours per week, or pay a
penalty. Regardless of whether an employer chooses to offer
coverage to employees working fewer than 30 hours per week, the new
health law should "solve some of the problems" with phased
retirement, says Pamela Perun, a retirement-policy consultant in
Nantucket, Mass. Many older workers have avoided pursuing reduced
work schedules for fear of losing their workplace health coverage.
On the new state-based health exchanges, older workers who lose
workplace insurance may be able to get more affordable coverage
than was traditionally available to them on the individual
Also consider phased retirement's impact on employer-provided
life insurance and disability coverage. Payouts may be based on
your reduced salary during the period of your phased retirement.
Or, depending on how much you reduce your hours, disability
coverage "may go away completely," says Anna Rappaport, chair of
the Society of Actuaries' committee on post-retirement needs and
risks. That may be a big stumbling block for people who are
considering phased retirement because of health concerns.
Can you make the pitch for phasing out?
If your company doesn't offer phased retirement, here's some good
news: Employers can be persuaded. At Rice, for example, the phased
retirement program was developed in response to a request from
faculty, Sanders says. When making your pitch, discuss how the move
might be beneficial to your employer, and demonstrate that you
"want to leave the organization with an effective transition" to
your successor, says Aon Hewitt's Leone. If you can make your case
alongside several other employees who are also approaching
retirement age, he says, you'll likely be even more persuasive.
However, there is a risk, Leone says, that workers stepping
forward for phased retirement could be laid off in tough economic
times. Be particularly wary "if it's a company that has no
alternative work options," Rappaport says.
Phased retirement may be an easy sell, though, if you have a
flexible employer that clearly values your skills and may have
trouble replacing you. Sarver, the housing program manager, says he
had no trouble persuading his employer to let him work a reduced
schedule. He had previously served on the organization's board of
directors, and "people knew my capabilities," he says. Now, Sarver
has the time to teach courses at nearby colleges and to think about
taking a trip to Africa next year. In his view, "people shouldn't
fear phased retirement," Sarver says. "Folks who are open to
embracing new opportunities really ought to go for it and enjoy