Can phased retirement be useful for better retirement planning?

Let’s consider a situation where you decide to start a strict diet. Suddenly giving up your favorite food can feel overwhelming. Cutting 1,000 calories from your daily diet all at once may sound like a good plan, but for many people, it is simply a bit too unrealistic. It can lead to mood swings, cravings, and sometimes even overeating.

Completely counterintuitive, right?

A more manageable approach might be to start small. Instead of removing 1,000 calories immediately, you might cut 200 calories first and slowly adjust over time.

A sudden retirement can also feel very similar to going on a super strict diet. For many people, going from a full-time job to not working at all can be difficult, to say the least. Work is not just about earning money. It is also about regular social interaction in the office, having a daily routine, and feeling fulfilled. When retirement knocks on your door suddenly, you may struggle with the change. But phased retirement can help.

Let’s understand if a phased retirement can be useful for better retirement planning.

What is phased retirement, and how does it work?

Phased retirement is exactly what it sounds like. It helps you retire but in phases. Instead of having a farewell party at work and never returning to the office again, you slowly step back from your responsibilities. For example, you might reduce your working hours, move to part-time work, take on occasional consulting roles, or work on limited projects instead of a full-time position.

Phased retirement can work in other ways. Your company may hire two people for the same role. You and the other individual would share the same position and responsibilities that come with it. Some employees may move into advisory roles where they mentor younger staff. Some employees shift into less demanding positions. Say you were in a very high-profile position earlier that required long hours and numerous meetings. With phased retirement, you may move to a different team or role within the same company.

Phased retirement vs traditional retirement – what is the difference?

Let’s check out some examples to understand how these two work:

Phased retirement

Say, you are the head of a family business. Instead of running the company full-time, you decide to pass the leadership role to your daughter. She takes over the day-to-day operations, while you step back into an advisory role. You may still offer guidance from time to time and share your experience when needed, but you will no longer be responsible for managing everything yourself. Such an approach allows you to remain connected to your work and spend some time on it while gradually adjusting to retirement.

Traditional retirement

In traditional retirement, you would select an age and retire then. Say you decide you want to retire at 65. When that time comes, you inform your employer of your plans. You review your retirement accounts, understand the withdrawal rules, and make sure your finances are in order. Once you retire, your working life will come to an end. You would say goodbye to your colleagues and then officially hang up your boots. From that point on, you are no longer expected to return to the workplace.

Your time may then be spent in other ways. You may travel, spend more time with family and friends, pursue hobbies, and simply enjoy life.

Benefits of phased retirement planning

Phased retirement planning can offer many benefits:

1. Gradual transition into retirement

Phased retirement allows you to enter your retirement years gradually, rather than making a sudden change. For many people, leaving work completely can be hard. Without work, you may lose your sense of purpose. You may fall out of touch with your colleagues and experience a sense of loss of identity and social connection.

With phased retirement, you can continue working while slowly adjusting to a new routine. This makes the transition less overwhelming. It also gives you time to plan how you want to spend your time in retirement.

2. Continued income

One of the biggest adjustments after retirement is living on a fixed or limited income. When you stop working completely, you may need to rely mainly on your retirement savings. Phased retirement can help you here. If you are still working, even if it is part-time, you continue to earn some income. Your earnings may be lower than before, but they can still provide financial support. This can give you more breathing room while you adjust to your retirement lifestyle.

Instead of immediately relying entirely on your retirement savings, you can gradually start using your savings while covering the rest with your income. This can help you stretch out your retirement investments and ensure you do not run out of money in the future.

3. Better retirement planning

Phased retirement can give you more time and clarity when planning your retirement finances. Instead of preparing for retirement only in theory, you actually experience what retirement life feels like while still earning some income. This can give you a clearer picture of your real expenses, daily routines, and financial needs. Experiencing this transition in real time can help you make better financial decisions. You are not just imagining and estimating how things would be in the future. You are actually seeing them firsthand.

Phased retirement can also be especially helpful if you feel that you need more time to prepare financially. Some people begin saving for retirement later in life or start their careers later than expected. In such situations, continuing to work can provide additional time to build your retirement savings. A few extra years of part-time income allow you to continue your contributions to retirement accounts such as a 401(k) plan or an Individual Retirement Account (IRA), which can make a difference. At the same time, you may also be delaying withdrawals from these accounts, which could give your investments more time to grow.

4. Supports your health

Phased retirement can be good for your overall health, both mentally and physically. The transition from work to complete retirement can affect your emotional well-being. Phased retirement helps make this transition smoother. Continuing to work helps you stay engaged and connected. Work often provides a sense of purpose. When people retire suddenly, they miss their routine, colleagues, duties, and more. This can sometimes lead to loneliness and, in worse situations, depression and anxiety.

With phased retirement, you still remain involved with your colleagues, which can help maintain a sense of identity and fulfillment. At the same time, because you are working fewer hours or taking on fewer responsibilities, the pressure and stress that often come with a full-time career may decrease. This balance can help you stay mentally active without feeling overwhelmed.

Phased retirement can also support your physical well-being. Working less gives you more time to rest and focus on your health. You may find it easier to exercise regularly, get more sleep, and slow down life in general.

5. Benefits employers

Phased retirement not only benefits employees. It can also provide advantages for organizations. Companies that offer phased retirement may see higher levels of employee satisfaction and loyalty. Employees are more likely to stay committed to the organization where they find flexibility. Phased retirement options may also allow companies to retain talent. Experienced employees carry years of knowledge that can be invaluable for companies. With phased retirement, employers can retain this valuable expertise for longer. During this transition period, senior employees can also mentor younger staff members. They can share their experience and train successors.

Phased retirement can also help companies manage workforce requirements. Instead of facing a shortage in expertise, companies can plan and prepare for replacements in advance. In addition, offering phased retirement options may reduce the risk of age discrimination concerns in the workplace. Giving older employees the opportunity to step back gradually and retire on their own terms demonstrates that a company values its workforce, regardless of age.

Phased retirement strategies for older workers

If you are considering phased retirement, it helps to have a clear strategy in place. Here are a few phased retirement strategies for older workers that may help:

1. Plan what you want to continue doing in the future, and talk to your employer about available options

Start by thinking about how you would like to work during this transition period. You may prefer to move into part-time roles, work occasionally as a consultant, or take on a project a few times a year.

Talk to your employer about available options, as not every company offers formal phased retirement programs. Ask if they provide flexible retirement arrangements or if there are ways to adjust your workload, schedule, or responsibilities as you approach retirement. You must also understand what your new role entails and make sure you are ok with it. For example, if your company wants to bring in another employee to take over part of your role, while you step back, you might share responsibilities with a successor. You may even have to train someone who will eventually replace you. Before agreeing to such arrangements, take time to consider whether you are comfortable with the change and whether it fits your retirement goals. It may not always feel good to see someone else take over your responsibilities. Ultimately, you need to opt for an arrangement that is easy on you.

2. Plan your finances

Finances are a very important part of phased retirement planning. It is important to understand how the change will affect your income. Start by thinking about the age at which you want to begin phased retirement. Your retirement age would determine whether you can access certain retirement accounts. For example, money in a 401(k) plan is available to you without early withdrawal penalties once you reach age 59½. If you begin phased retirement before that age, you may not be able to withdraw funds from your 401(k) penalty-free. In that situation, you might have to rely mainly on the income you continue to earn from part-time work. It is also important to understand how other retirement benefits may fit into your plan. For example, if your employer offers a pension, you should find out when you become eligible to receive it and how your retirement timing might affect the benefit amount.

You can talk to your employer to understand the details of your retirement benefits. And, it can also be helpful to speak with a financial advisor.

3. Think about how you want to spend your free time

Think about how you want to use the extra time. For example, if you plan to travel more during your retirement years, you may want a work arrangement that offers flexibility. Consulting roles, project-based work, or occasional gigs can allow you to take long breaks in between while still staying professionally active.

On the other hand, if you want to spend more time at home with family or focus on your hobbies, part-time work or work from home with reduced hours might be a better option. Working fewer hours can give you more control over how you spend your day.

Yes, phased retirement can be useful for many people. However, whether it works for you depends on your personal situation. You need to consider your financial situation and evaluate how much you have saved so far. If you have enough retirement savings and feel comfortable stopping work entirely, traditional retirement can be a suitable path to choose. You would finally have the freedom and time to live life as you please. But if you feel that continuing to earn some income would give you more financial flexibility later in life, phased retirement might be a good option.

You should also think about what you want your retirement life to look like. Some people look forward to retiring and not working at all. However, some people may not like the idea of stopping work altogether. Your personal preferences, therefore, matter just as much as your financial situation.

If you are unsure which approach is best for you, speaking with a financial advisor can help. You may explore our financial advisor directory to connect with financial advisors near you who may be able to help you make a decision.

Frequently Asked Questions (FAQs) about phased retirement strategies for older workers

1. Do employers offer phased retirement options?

Some employers do offer phased retirement programs, but not all companies. If you are interested in this type of arrangement, the first step is to speak with your employer.

Even if your company does not officially offer phased retirement, you may still be able to create a similar arrangement for yourself by taking on part-time work elsewhere.

2. Who should consider phased retirement?

Phased retirement can be a good option for several types of individuals:

It may work well for people who do not want to stop working completely but would prefer a lighter schedule.
It can help those who feel they need a few more years of income to build their retirement savings.
It can be suitable for early retirees who retire in their 40s or 50s rather than in their 60s and beyond.
In addition, people with health considerations may find phased retirement helpful.

3. Phased retirement vs traditional retirement – which is better?

There is no single answer to this question. The right choice depends on your personal and financial situation. Some people prefer traditional retirement. Others may feel more comfortable transitioning gradually through phased retirement.

It can be helpful to speak with a financial advisor to help you determine which approach may work best for you.

For additional information on retirement planning strategies that can be tailored to your specific financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm that manages private client accounts for individuals and families across America. As an SEC-registered investment advisor (RIA) firm, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services tailored to each client’s unique needs, providing institutional-caliber money management based on a solid, proven research approach. Additionally, each client receives comprehensive financial planning to help them move toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.