Transitioning from full-time work to retirement can be a daunting prospect. Phasing into retirement offers a solution, allowing you to gradually reduce your work hours while enjoying the financial benefits and flexibility of retirement. This strategy is gaining popularity, with over half of workers desiring a phased approach, according to a 2023 survey by Principal Financial.
Benefits of Phased Retirement
1. Preserve Retirement Savings and Contribute More:
Even with a reduced income, continuing to work can minimize withdrawals from retirement savings, allowing your investments to continue growing tax-advantaged. Additionally, you may still be eligible to contribute to your employer’s 401(k) and receive an employer match, boosting your retirement savings.2. Delay Social Security and Increase Lifetime Income:
Delaying Social Security benefits while earning part-time income can significantly increase your monthly payouts when you eventually claim benefits. For each year you delay claiming between your full retirement age and age 70, your annual benefits increase by 8%.3. Qualify for Larger Social Security Benefits:
Working longer, even part-time, can replace years with low or no earnings in the Social Security formula, resulting in higher benefits. This is particularly beneficial for individuals who took time off work to raise children or pursue education.4. Obtain Health Insurance Before Age 65:
Many employers offer health insurance to part-time workers, providing affordable coverage before becoming eligible for Medicare. If your employer does not offer health insurance, you can explore the Affordable Care Act marketplace for subsidized coverage.5. Execute a Roth Conversion:
Consider converting a portion of your traditional IRA or 401(k) to a Roth IRA while phasing into retirement. The tax savings from the conversion can be covered by your earnings, providing tax-free growth and avoiding required minimum distributions.Flexible Retirement Options
The flexibility of phased retirement allows for various work arrangements, tailored to your preferences and career field. Here are some examples:
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Consulting or Contract Work:
Retire from full-time work but continue to provide services in a related field or for your former employer on a contract basis.*
Part-Time Employment:
Transition to a part-time role in a non-profit organization or explore flexible gig work arrangements.*
Continued Part-Time Work with Employer:
Maintain a reduced work schedule with your longtime employer, potentially enjoying benefits such as health insurance and 401(k) contributions.Planning Your Phased Retirement
To maximize the benefits of phased retirement, consider these strategies:
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Communicate with Your Manager:
Initiate discussions with your manager about a phased retirement plan at least a year in advance. Outline your proposed work arrangement and explain how you will continue to add value to the company.*
Explore Health Insurance Options:
Understand the impact on your health insurance coverage and how you can maintain or obtain affordable coverage after reducing your hours.*
Negotiate Terms:
If your employer is willing to consider a phased retirement, negotiate terms that align with your financial and lifestyle goals.*
Enhance Your Skills and Stay Healthy:
Maintain your job skills and live an active lifestyle to enhance your negotiating power and prepare for future retirement.*
