As economic and social factors continue to change it seems that the way people retire is changing with them. As the average retirement age continues to rise, some people are looking at a completely different way to retire. More and more retirees are looking into phased retirement programs as an alternative to traditional retirement and if you are one of these people it is important to weigh the pros and cons of phased retirement before making your decision.
Phased Retirement
The term phased retirement refers to a relatively new form of retirement that many retirees are turning to. Phased retirement involves a retiree staying on as a part-time employee at their place of work rather than retiring completely. These plans serve as a sort of “soft-retirement”.
Pros
- The major benefit to a phased retirement plan is that you can stay employed as a part-time employee. This means that you continue to get paid and receive a steady income. By continuing to work and receive paychecks, you can withdraw less retirement and prevent having to withdraw Social Security prematurely. Phased retirement can provide extra financial security and potentially give your retirement some extra time to grow.
- Phased retirement can also provide you with a much more gradual transition into retirement. This offers you an ideal situation if you are of retirement age but are not yet ready to leave the work force. It gives you a chance to test the waters of retirement and determine exactly what you will want to do when you are fully retired. For example, you can keep working part-time and use your extra free time to experiment with various activities and lifestyles to figure out which will be right for you once you are fully retired. A phased retirement can be perfect if you aren’t quite ready to retire, but you would like to scale back your hours at work to spend more time with family and friends.
- Another advantage of phased retirement is that it can present you with a situation where you have a backup plan. With phased retirement, you are not fully retired and you have the opportunity to better gauge the economic climate and the potential effects it will have on your retirement before you fully retire. This can add an extra sense of security and better protect you against financial disaster.
Cons
- One of the main drawbacks to phased retirement is that many employers do not offer health coverage to part-time employees. This means that if you are on a phased retirement plan, and are not yet eligible for Medicare (age 65), then you will be paying for any health care you require all by yourself. This can become very expensive, very quickly.
- Another potential issue with phased retirement is that it can have a negative impact some of your retirement benefits. Some pension payments are based off of your average salary during your last few years of employment and if you are on a phased retirement plan working part-time it will lower your pension payments. This situation could also be applicable to some life insurance policies.
- Finally, a major downside to phased retirement plans is simply the fact that not many employers actually offer them. It could even be possible that your employer offers phased retirement, but not for you particular position. This could make the decision very easy for you as a phased retirement option may not even be available to you.
While a phased retirement plan can offer some substantial benefits, there are also some potential drawbacks that you must be aware of. Depending on your own personal situation, hopefully you can compare these various pros and cons to better determine if a phased retirement plan is right for you. However, it is always a good idea to discuss any retirement planning decisions with a financial advisor or retirement professional, as this can give you a better understanding of the options available to you and the implications of any decisions you make.
Louis Mack is a seasoned retirement planner who currently writes on behalf of NewRetirement. When he’s not giving people advice on retirement and financial planning, he enjoys making weekly trips to his local Saturday market.
