Benefits and Drawbacks of Phased Retirement
American workers of a certain age -- like you -- have strong notions about how they want the rest of their careers to go.
Well past the halfway point of your working years, you want to make more room in your life for pursuits beyond gainful employment. But to avoid the psychological and financial shocks that prior generations of parents or grandparents felt, you may not want to leap from a permanent position behind a desk to a permanent slouch on a lawn chair -- literally overnight.
You'd like to retire to a comfortable standard of living, but maybe you haven't quite earned your way there. And you don't want your story to be like About Schmidt, in which Jack Nicholson plays a retiree in search of a life.
Thanks to an emerging trend called phased retirement, you might be able to choose a middle path that allows reduced work hours, more flextime and maybe even collecting retirement benefits -- all in exchange for a substantially smaller paycheck.
If this sounds appealing, you've not the only one who thinks so: Some 63 percent of workers between ages 50 and 70 say they would like to work part-time before full retirement, according to a 2004 study by human resources consulting firm Watson Wyatt.
But to follow this seemingly simple path, you may have to be something of a pioneer. There are a number of obstacles to downshifting your career with a longtime employer.
What Is Phased Retirement?
Phased retirement begins with working part-time or unconventional hours, but it doesn't end there.
"I don't consider just slowing down to be a comprehensive phased-retirement program," says Larry Anderson, president of the National Older Worker Career Center. "People will need access to retirement benefits in a phased way, such as partial Social Security payments that would extend the life of those funds."
Older workers looking to phase out their careers rather than simply turn off the lights on them often find that they must ad lib, in collaboration with their bosses and HR.
"We're finding that informal arrangements exist at almost every employer, but formal programs are rare," says Steve Vernon, a vice president at Watson Wyatt Worldwide.
Lincoln Financial Group, an enthusiastic proponent of phased retirement as a tool for retention and the transfer of knowledge from experienced workers to younger ones, is typical. "We don't have a specific program for phased retirement," says Karen Fowler-Williams, vice president of employee relations and diversity. "It's all within our regular flex program."
Employees can retain full benefits if they work a minimum of 20 hours per week, according to Fowler-Williams. Those on a path to retirement usually remain in the part-time phase for a period of months; occasionally a worker stays in the program for two years.
Legal and Practical Limitations to Phased Retirement
Why haven't more employers formalized their phased-retirement programs? One reason is that the federal government hasn't acted to end uncertainty about how employers must treat defined-benefit pensions and retiree medical coverage under phased retirement.
In 2005, pension rules barred employers from giving partial retirement payments to workers who wanted to cut their hours before retirement age. Further, "there's often a requirement that employees go directly from full-time employment to full retirement, or they'll lose their medical benefits," says Carol Weiser, a partner with law firm Sutherland Asbill & Brennan LLP.
However, the Pension Protection Act of 2006 allows workers 62 and older to receive pension distributions while still working part time.
Even if these new regulations remove the cloud hanging over phased retirement benefits, older workers should think twice about beginning to draw down funds before full retirement, according to Vernon. "Part-time pay together with a part-time pension is a dumb idea. Employees should let retirement resources ride and grow," because they usually haven't saved enough.