What Is a Phased Retirement?

We often think of achieving retirement as something akin to finishing a marathon. Once you cross that finish line, you’ll be rewarded with decades of financial independence and the freedom to spend your time how you choose.

Today, the thought of quitting work “cold turkey” is unappealing — even anxiety-inducing — for many retirement-aged individuals. Working 9-5 one day and living in full-time retirement the next can be a jarring transition. Depending on how mentally, emotionally, and financially ready someone is to fully enter retirement, such a sudden change may even lead to risks like depression and isolation. 

These days, retirement is not so much a distinct finish line as it is a new phase in life — one that’s less defined than ever before.

The current state of retirement

While retirement age today still hovers around 65, it appears that, generally speaking, many people still struggle to save enough to last them through their retirement years.

For example, the median amount of retirement savings for those between the ages of 65 and 74 is around $200,000, which, for many, won’t be enough to cover their financial obligations throughout retirement.¹ The increasing cost of living, as well as longer expected lifespans (today, it’s not unusual for people to enjoy 30+ years in retirement) make meager savings a growing issue for many retirees.

To help fill the gap between what they’ve saved and what they’ll need to live comfortably (among other reasons), more and more retirees are opting to reenter the workforce in retirement. Around 19% of those 65 and older are working today, which equates to about 11 million adults. For reference, that’s nearly four times the number of retirees working in the 1980s.²   

Introducing “phased retirement”

Phased retirement is a general term used to describe any non-traditional retirement plan that involves working past your initial retirement date.

For example, rather than leaving your job for good, you may have the option from your employer to reduce your hours and work with the company part-time. Over time, the hours can gradually decrease until you're ready to leave completely. Or, after retirement, you may choose to come back to work on an as-needed or consultant basis, to provide additional guidance and oversight. 

Opting for a phased retirement doesn’t mean you have to stay with your original employer either — though some larger companies do offer dedicated phased retirement programs for their employees. You could choose to pursue a less stressful part-time or seasonal job, do freelance work, or otherwise take your career path in a different direction. 

The benefits of phased retirement

A phased retirement is meant to ease people into retirement gradually, and it can offer several benefits.

Namely, the more you work, the longer you’ll continue to cash a paycheck. Though your paycheck will likely be smaller after your hours are reduced, it still may be enough to cover your recurring financial obligations. The longer you can wait to start drawing down your savings and investments, the more time you’ll give your money to grow and compound.

A phased retirement can be especially helpful if the market is down when you're considering retiring. If you’re in no hurry to enter retirement, you could continue working reduced hours, living on a paycheck, and giving your portfolio time to recover. Doing so can help protect you and your retirement income from sequence of returns risk, which refers to the risk of a market downturn occurring early in your retirement years.

Other notable benefits include: 

Enjoying some flexibility: With a phased retirement, the transition doesn’t feel so much like you’re leaping into the unknown. Rather, it feels like you’re testing the waters ahead, keeping one foot firmly planted on the ground. You’re starting to understand what full retirement will feel like, while still enjoying the stability and comfort of a steady job.

Keeping your social circle: After spending years — often decades — working for the same employer or in the same field, we tend to build our social circles around our coworkers and colleagues. When you continue working into retirement, you’ll continue to see some of your close friends and colleagues, which can be comforting during this period of transition. At the same time, having some extra hours or days off work can help you explore new hobbies, set new routines, and find places in the community to start forging new friendships (local coffee shops, the library, clubs, etc.).

Maximizing your earnings: For most people, the years leading into retirement are considered their “peak earning years,” meaning that’s the most money they’ll earn in their careers. So the more time you can spend working at your peak earning potential, the more you’ll have to boost your savings, add to your portfolio, or otherwise prep for full retirement.

The great thing about a phased retirement, especially when it’s done through a company that offers a dedicated program, is that it can often be beneficial for both the retiree and the employer. The employee gets to cut back their hours and gradually ease into retirement. At the same time, the company isn’t left in the lurch when a key employee leaves. The retiree can stay on for longer and help train their replacement, keep business operations running smoothly, and otherwise limit the impact of their departure. With both parties on board, there’s often less pressure on the retiree to work more hours or leave before they're ready.

The drawbacks of phased retirement

Before diving headfirst into planning your own phased retirement, make sure you factor in and plan for the drawbacks.

Health insurance: Depending on your company’s benefits policies, working part-time hours may make you ineligible for benefits like health insurance or paid leave. If you’re not yet 65 and eligible for Medicare, you may need to prepare to pay more for your healthcare coverage. If your spouse’s workplace offers a plan, you may be able to join theirs as a dependent. If not, find out from your employer if you’re eligible for COBRA. This will enable you to maintain coverage from your current plan, but you’ll be responsible for paying the full monthly premium, as your employer will no longer subsidize it. Or, you can search your state’s marketplace for a new plan. 

Impacts on your life insurance policies: Certain life insurance policies and pension plans will base payments on the policyholder’s average salary during their last several years of employment (again, these are typically peak earning years). If you’re reducing your hours and your paycheck, it could potentially create lower payments from your policies and plans. Check with your policy provider and pension plan administrator to find out if a phased retirement could affect your payments.

You’re still working: If you dislike certain parts of your job — like waking up early, commuting, or interacting with certain people — working fewer hours does not necessarily alleviate those frustrations. You could try looking for another job with a different company during this transition, though you risk facing a tough job market or finding positions with less pay or flexibility.

Missing the fun stuff: If you're married and your spouse is retired, they might want to take full advantage of their younger years in retirement by traveling, visiting family, and heading out on new adventures. If you’re still tethered to a desk (even part-time), it can be difficult for you and your spouse to enjoy the beginning of your retirement together. To help mitigate this potential challenge, talk with your spouse openly and honestly about the benefits and drawbacks of a phased retirement.

Consider easing your way into retirement

When you have the option to enjoy a gradual entry into retirement, it’s certainly something worth considering. Not only can it help you mentally and emotionally prepare for a life outside of work, but it can offer you some additional financial peace of mind. 

Is a phased retirement right for you? The answer will be different for everyone, but be sure to weigh the benefits and drawbacks carefully against your own financial situation and retirement readiness before making a decision.