Lauran Madariaga, 69, was ready to retire in June from her
job as a lead client service specialist at Mercer Advisors, a wealth management
firm. Then her boss asked her to stay on part-time because he was having
difficulty finding employees.
Madariaga, who was already on track to collect her maximum
benefit from Social Security, agreed to work 20 hours a week for two more months,
postponing her retirement until right before she turned 70 on Sept. 1.
“I was ready to be done and free, but this is a good
transition,” says Madariaga, of Silverado, Calif, who was happy to ensure a
smooth adjustment for her clients. With her retirement savings in solid shape,
the extra money was just a nice bonus.
For generations, retirement was seen as a binary state:
Either you were working or you were retired. These days, though, necessity is
pushing more people into phased retirements that ease employees out of the
workforce in stages.
A survey by global consulting firm Mercer found that 18% of
U.S. respondents say they plan to transition from full-time to part-time work
before fully retiring over the next year. That part-time work may be for a
current or new employer or from self-employment.
Phased retirements have long held appeal for employees
because they can enjoy more free time without sacrificing earned income
entirely. The transition can stretch a nest egg or allow more time for it to
grow, an important feature when people are living longer and retirement can
last 20 or 30 years.
Retiring in stages also gives people time to adjust
psychologically. What’s new is that workers who want to retire gradually may
find more support from employers, who have their own reasons to embrace phased
retirements, especially in a tight labor market.
Even with that support, other pieces of the phased
retirement puzzle need to be in place for it to work. This is particularly true
for younger retirees who aren’t eligible for Medicare and don’t want to file
early for Social Security, which reduces benefits permanently.
That means having access to private health insurance,
adequate savings, little to no debt, and perhaps even a way to continue saving.
But the key piece of the puzzle is the source of paid work.
Without it, there is no phased retirement.
The Idea Catches On at Companies
The pandemic changed
how people work, opening the door to phased retirements and other flexible ways
of working. “We’ve learned people can work remotely, they can successfully
telecommute, and they can work alternative hours,” says Catherine Collinson,
chief executive officer and president of Transamerica Institute and its
Transamerica Center for Retirement Studies.
In fact, as employers scramble to fill jobs, Collinson
believes phased retirement is becoming an employee retention tool. “Without it,
retirement becomes an all-or-nothing proposition, and companies risk losing
employees,” she says.
“Phased retirement is the next demographic trend,” says
Steve Parrish, co-director of The American College of Financial Services,
adding that companies also are facing “the brain drain of the baby boomers who
are retiring.” Employers are keen, he notes, to find ways to keep and pass on
to a successor the institutional knowledge long-time workers have built up over
years.
Even governments have an interest in keeping older workers
employed, at least part-time, says Yvonne Sonsino, global co-leader of Mercer’s
Next Stage, which studies companies and the aging workforce. When people don’t
work anymore it affects every country’s tax base, “causing a massive cash flow
issue,” she says.
Informal Phased Retirement Plans More Common
Formal phased
retirement programs are still rare, with only 6% of companies offering them,
according to the Society of Human Resource Management. More common, especially
with small and medium-size companies, is an informal plan negotiated between
employer and employee.
But the idea is catching on. In a 2022 SHRM survey, 23% of
respondents said they offered a formal or informal phased retirement program,
up from 19% in 2018.
Owens Corning, a manufacturer of construction material in
Toledo, Ohio, is that rare company with a formal plan. It began in 2018 as a
pilot program that made phased retirements available to U.S.-based salaried
employees who are 55 or older and have worked for the company for at least five
years.
The program was launched in part because employees who
wanted to retire were usually giving about a month’s notice before leaving,
“and we ended up scrambling with how to transfer institutional knowledge,” says
Paula Russell, Owens Corning executive vice president and chief human resources
officer.
Employees also were looking for a smoother transition that
didn’t feel so abrupt. “We did hear from employees that they wanted a better
way to retire that didn’t feel like jumping off a cliff,” Russell says. Owens
Corning employees eligible for a phased retirement can reduce their hours with
no loss of benefits, except for prorated vacation and salary.
Typically, employees who want a phased retirement work the
most hours at the beginning and decrease them as their successors come up to
speed, says Allison Anderson, the company’s director of global benefits. The
company caps the maximum length of a phased retirement at two years, with a
year to 18 months the typical duration, Anderson says.
“We didn’t want people to just linger and come in a day or
two a week.” Employees who want a phased retirement must apply for the program
and get approval from their superior and HR. About 20 employees have taken
advantage of the program since 2018, with 10 more joining this year after it
was advertised more widely through the company, Russell says.
Making the Numbers Work
Even though a phased retirement lets you bring home some
income, it may not be enough to survive on, let alone enjoy your new-found
freedom. Everything—savings, investments, pension plans, current income,
potential future income and debt—needs to be assessed to determine whether a
gradual retirement, or any retirement, is even possible.
“If a person is contemplating a phased retirement now, they
should consider getting rid of debt. Otherwise, their cash flow may be in
jeopardy,” Parrish says. The exceptions may be mortgage and car payments,
provided they aren’t too high.
One of the stickiest points is the optimal time to take
Social Security, which you can claim as early as age 62, though the amount will
be reduced.
“There’s a guaranteed increase for every year you wait after
62,” says Tyler Papaz, director of private wealth at Cornerstone, an asset
management company in Bethlehem, Pa. “That’s very appealing when you compare it
to the uncertainty of the market returns, especially the environment we’re in
now.”
Like Madariaga, you could wait until you’re 70 to collect
the maximum benefit possible, but there’s no reason to delay after that age
because the base payment won’t increase. Collecting Social Security early while
working parttime also poses problems.
Social Security will deduct $1 from your benefits for every
$2 earned above $19,560 in 2022 if you are younger than full retirement age,
which is about 66 or 67 years old depending on your birth year.
The limit is more generous the year you turn your full retirement
age, when you can earn up to $51,960. Those withheld benefits will be paid
later, but it’s important to be aware of the temporary hit to that income if
you’ll need it to live on during phased retirement, says Mari Adam, a certified
financial planner with Mercer Advisors in Boca Raton, Fla.
To avoid taking Social Security early altogether, you could
withdraw some of your retirement savings from a 401(k) or an IRA, Adam
suggests. That can be done without penalties at age 59½ for an IRA and, in some
cases, age 55 for a 401(k).
“I would say you’re better off, in most circumstances,
taking a little bit of money out of your IRA or your personal savings and leave
your Social Security as long as you can,” she says.
If you tap retirement accounts, do it carefully so that you
don’t jeopardize the long-term health of those savings.
The cost of health insurance should be part of the
calculation for when to claim Social Security. Medicare isn’t an option for
anyone younger than 65. Until the passage of the Affordable Care Act in 2010, a
phased retirement generally wasn’t feasible for most people younger than 65,
but buying health insurance through the ACA health exchanges gives younger
retirees access to a plan that covers preexisting conditions.
Even so, the insurance can be expensive, especially if it
includes coverage for a spouse or family. Adam estimates a couple over 50 years
old can easily pay more than $1,200 monthly.
Staying on a company’s health insurance through COBRA for up
to 18 months can help bridge the gap until Medicare, although that can be
pricy, too. Under COBRA, you’ll pay the full cost of the health insurance and
additional administrative fees.
Gregg Zoroya, 68, of Arlington, Va., had to balance all of
these factors when he was considering whether to retire from his job as a
journalist at USA Today several years ago. He had worked there for 25 years and
was more than ready to move on to another stage in his life.
He had already published one book while juggling his job,
“which was grueling,” he says. Although he was ready to start writing another,
he wanted to retire from his full-time job first. Zoroya’s financial planner
urged him to wait until he turned 70 to maximize Social Security benefits.
“We clashed over it,” Zoroya says. “He kept saying, ‘You
might live into your 90s, and you have to be solvent.’ But there’s also the
issue of quality of life.” Zoroya and his wife Faye started crunching the
numbers to determine how much he would forfeit in benefits if he claimed before
age 70. They discovered the book contract would more than make up the
difference.
The financial planner got on board, and Zoroya took Social
Security at 68. His wife will wait until she is 70 years old.
There was one more obstacle, however—health insurance for
Faye, who was on his health insurance plan. So Zoroya delayed leaving his job
until his wife turned 65 and could collect Medicare. “That was the determining
factor,” he says. “That made retirement possible.”
Negotiate the Best Deal
One big advantage of
a phased retirement is that you can continue building a nest egg. Although
there is no age limit for contributing to an IRA, you do need earned income.
Someone age 50 or older can contribute up to $7,000 to an IRA in 2022 or 100%
of earned income, whichever is less.
You also may be able to continue saving in an employer’s
401(k). In the past, companies could exclude employees from participating in
the plan if they worked fewer than 1,000 hours a year, but the Setting Every
Community Up for Retirement Enhancement Act of 2019 changed that. Now,
part-time employees who have worked 500 hours a year for three consecutive
years are eligible to participate.
Depending on the plan’s rules, you may be able to continue
contributing when you reduce your hours. If you plan to negotiate a phased
retirement with your employer, it’s worth asking for everything you want,
Parrish says, because many companies in their eagerness to retain people are
proving generous.
Even if you don’t plan to stay with the company, try to get
the best deal possible. After announcing that he was retiring, Zoroya asked his
manager for a buyout that previously had been offered to employees but was no
longer available. Zoroya expected the answer would be no; instead, he got a
yes.
If your company doesn’t have an official phased retirement
plan, ask colleagues who have negotiated their own partial retirement about
their experiences, Collinson says. If a formal program exists, “look for
colleagues who experienced it and learn about the journey and if there are
unexpected pitfalls. Early in their careers, people are advised to get mentors,
but we don’t often talk about retirement mentors.”
No Short Goodbyes
Phasing out of the workforce also eliminates the
psychological whiplash that comes from leaving a long career abruptly. That’s
particularly hard on people who don’t know how they want to spend their time in
retirement or can’t spend it the way they had planned. It’s even harder on
those whose identities are closely tied to their jobs.
James Boylan worked as a gastroenterologist in private
practice in Bethlehem, Pa., for more than 35 years before retiring in 2019 at
age 73. “But I was kind of bored,” he says.
It didn’t help that the coronavirus hit shortly afterwards,
putting the kibosh on his travel plans. With a pandemic raging, he realized he
wanted to keep his hand in medicine, not for the money but for the stimulation.
“I really like to do medicine,” he says. “In my profession,
if you don’t keep working, you lose a lot of your identity.”
Boylan found a happy medium. Now he works about a day and a
half a week in a friend’s practice and also as a locum—a temporary doctor—at a
hospital in Medford, Ore. Boylan travels there for about a week every other
month. The low-income area has doctor shortages, especially in specialities
such as gastroenterology.
“Working full-time felt like a grind,” he says. “Now I’m not
running my own practice, and I don’t have to do it every day. I have a lot of
freedom.” Zoroya, the journalist, says it was initially jarring “not to be part
of a big news event. You’re in the game with what’s going on and then you’re
not. But I have no regrets about the decision I made.”
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