Here’s what you need to know about phased retirement:
1) You’ll see whether your retirement savings is really enough. “A lot of individuals don’t realize how stressful it is to transition from work to retirement. Phased retirement allows pre-retirees to get a glimpse of retirement, what they want it to look like, and then map it out for themselves so they can transition slowly,†says financial advisor Barbara Walker-Green of Advanced Wealth and Retirement Planning Concepts.
2) Social Security benefits will be temporarily reduced. If you are less than full retirement age (currently 66 years old) and earn more than $15,120, Social Security temporarily reduces your monthly benefit by deducting one dollar from every two you earn over that annual limit. Your benefits are re-calculated once you reach full retirement age, excluding any months when the payout was reduced or withheld, which could potentially boost your monthly payout. Retirees would also receive their full benefits, on top of any wages.
“No one knows how long retirement is going to be. So you want to look at a full picture to determine when you take that benefit,†says Dorothy J. Clark, a spokesperson with the Social Security Administration.
Retirees can start collecting Social Security after they turn 62 years old, however, Clark encourages older workers to hold out for as long as possible in order to get a larger payout. Let’s assume you have reached full retirement age and your monthly benefit is $1,000. If you claim Social Security at age 62 then your benefits will be reduced by 25%, leaving you with $750 a month. Now if you wait until you are 70, then delayed retirement credits would push your monthly payout to $1,320. Use the Social Administration’s Retirement Estimator to get a sense how part-time work would affect your monthly retirement benefits.
3) You might lose eligibility for employer-sponsored health coverage. Walker-Green says many seniors continue working just to keep their health insurance. The Williams were lucky enough to retain their health coverage as part of their retirement package, but Walker-Green advises those eyeing a part-time schedule to first check with their employer to see if they would still eligible for coverage.
4) Your life insurance benefits could be reduced. Sean Wilson, a New York-based wealth management advisor with TIAA-CREF, says many people overlook the impact part-time employment may have on spousal benefits. Many employer-sponsored life insurance plans are linked to pay, so a reduction in hours could reduce benefits.
5) Your pension could be reduced. The same goes for pension plans. Some companies link pension payments to your average earnings, which means part-time employment could lower that figure, while others base it on your total earnings. Not many companies offer formal phased retirement plans, so the responsibility to plan carefully falls on the individual. Wilson works with his clients to assess their desired lifestyle and explore all of their different options.
“The way you access money you’ve been saving for retirement is very important. Do we start with tax-deferred? Do we start Social Security now or do we delay? Do we annuitize a portion of the money to set up a monthly income stream and cover basic needs?†Wilson asks, noting taxes play an important role in determining where to start.
Wilson says he’s seen clients phase into retirement in as little as a year. Walker-Green says it’s common for employees to plan for a one to three year transition, but she’s noticing younger workers planning longer transition so they can retire even earlier.