Gradual Retirement Can Ease Stress and Cash Flow

Jane Young, CFP, EA

Jane Young, CFP, EA

As the average life expectancy increases retirement is starting to look very different.   We may be less likely to completely stop working on a fixed, predetermined date.  As the traditional retirement age of 65 approaches many are considering a more gradual transition into retirement.

One advantage of easing into retirement includes the ability to supplement your cash flow and reduce the amount needed to be withdrawn from your retirement savings.  If you continue working after 65 you may be able to earn enough to delay taking Social Security until 70.  This will provide additional financial security because your Social Security benefit increases 8% per year from your normal retirement age to age 70.  The normal Social Security retirement age is between 66 and 67.

Abruptly going into retirement can be very traumatic because careers provide us with a sense of purpose, a feeling of accomplishment and self-esteem.   Your social structure can also be closely tied to work.  By working part time before completely retiring, you can gradually transition into the new phase of your life.   As you approach retirement age the grind of working 40 to 50 hours per week can become very trying.   Working part time allows you to stay engaged with your career while taking some time to relax and pursue other interests.

According to a 2012 study by the Bureau of Labor Statistics, more people are working beyond age 65.  In 2012 about 18.5% of Americans over 65 were still working vs. only 10.8% in 1985.  A study reported by the Journal of Occupational Health and Psychology stated there are health benefits from working part time during retirement.  This may be attributed to less stress and a more balanced life while experiencing the mental stimulation gained from continued engagement at work.

Gradually transitioning into retirement may be more practical for someone who is self-employed.  However, the concept of phased retirement is a hot topic among human relations firms and departments.  Phased retirement programs usually involve working about 20 hours a week with some element of mentoring less experienced workers.  Formal phased retirement programs are still rare but they are gaining popularity.  A 2010 study by AARP and the Society for Human Resources Management found that about 20% of the organizations polled had a phased retirement program or were planning to start a one.  In fact, the federal government just launched a phased retirement program.

Before signing up for a phased retirement plan, take steps to fully understand the impact it may have on your benefits.  If you are under 65 there may be restrictions on your health insurance.   Additionally, some pension calculations are based on your final years of salary, working fewer hours at this time could negatively impact your benefit.  Also avoid situations where you are only paid for 20 hours a week but still work 30 or 40 hours to get your job done.