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In the past, retirement has been like flipping a switch. One day you’re a regular working Joe, the next, you’re living the retirement dream, filling your days with travel, hobbies, time with family . . . whatever you want, because you’re the boss now, right?
But today’s workers envision a much different transition into retirement. According to a report from TransAmerica Center for Retirement Studies, more than 40% of today’s workers are planning a phased approach to their golden years, reducing their work hours or choosing a new job that’s less demanding or more personally satisfying.
It’s a concept workers of all ages are exploring. Both Generation X and Millennials have embraced the idea, with 44% of each age group planning such a transition.
What Is Phased Retirement?
Phasing your way into retirement is like taking steps into the shallow end of a swimming pool as opposed to diving head first into the deep end. You, your employer and your investing professional establish a written plan that allows you to cut back on your work hours and responsibility—reducing work-related stress and increasing your free time.
“We work with several clients who, by cutting their hours from 40—maybe 60 or more depending on the person or profession—down to 20 or 30, have found that they still have plenty of time to spend relaxing, traveling or visiting family,” Brant Spesshardt, an investing professional in Raleigh, explained.
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Options for phased retirement are virtually unlimited. Your plan can span a few months or a few years. Depending on your financial situation, you can begin easing into retirement before, at or after traditional retirement age.
You can take on consulting jobs, stay with your current employer or choose a new job you’ve always wanted to try.
“Whether you’re working because you want to or because you have to, it’s important to choose something that makes you happy,” Brant said. “The stress of working at a job you don’t enjoy or don’t find fulfilling just isn’t worth it at this stage of life.”
A Possible Solution to the Savings Gap
The driving factor behind the choice to phase into retirement is often a lack of savings. More than six in 10 workers say they will work in retirement or past age 65 because they haven’t saved enough to fully retire, want the income or need access to health benefits through their employer.
While easing your way into retirement can help you close your retirement savings gap, you’ll need to avoid withdrawing funds from your retirement accounts. That may sound like a tall order, especially since cutting back on work hours will likely mean cutting back on income, but it may be easier than you think.
“Between Social Security and income from part-time work, you may not need to withdraw money from your retirement accounts at all,” Brant said.
The median income for a worker age 65 or older is about $47,000. On a phased retirement plan that cuts their income by half, they’d earn more than $23,000. That, plus the average Social Security payout of $16,000, would give our phasing retiree an annual income of nearly $40,000—not too far off from what they were making working full time.
But that’s not the only benefit. If our phasing retiree has a retirement nest egg of $750,000 and leaves it to grow while he works part-time for five years, he can step into full retirement with more than $1.2 million!
How to Handle the Financial Juggling Act
Whether you’re phasing your way into retirement or flipping the retirement switch, no two people have exactly the same plan.
“That’s why one of the best things you can do is ‘practice’ your retirement plan,” Brant recommended. “Create a budget based on your new income and add expenses for the new things you’ll do with your free time.”
Practice living on that budget before you commit to your phased retirement plan, so you know it will work.
Timing is important too. For example, if you claim Social Security before age 66 for retirees born between 1943–1954, your benefits the next year will be reduced by $1 for every $2 you earn over $15,120. That would be a budget-buster if you haven’t planned for it.
You’ll also want to make sure you still qualify for health benefits from your employer once you’re no longer working full time.
In the later stages of your phased retirement plan, you may want to begin supplementing your income with funds from your retirement accounts. It’s important to plan your withdrawals to avoid any penalties or additional income taxes.
“You have to make decisions that makes sense today and 10 or 15 years from now,” Brant explained.
Find Your Path With a Pro
An experienced investing professional can help you with those choices so your phased retirement plan is a success. But don’t wait until you’re ready to step into retirement to talk to a pro.
Your professional can help you at any stage of the game, from those who are just starting to save to those who may have gotten slightly off track to those who need advice for their transition into retirement.
If you aren’t already working with an investing professional, try SmartVestor to easily find a pro in your area today!