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Step Down: A Phased Approach to Retirement Stretches Savings

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May 18, 2015
Step-down to a phased retirement

Call it phased retirement. Or mini retirement. Retirement lite? Whatever you call it, we’re talking about a planned, gradual step-down from full-time work before a last leap into leisure. This option, assuming your employer agrees, can be emotionally rewarding, give you the flex time you crave, and stretch the savings needed to fund increasingly longer retirements challenged by longevity and market volatility.

For corporations, the payoff is keeping skilled, experienced workers for as long as possible—staff who not only continue to contribute, but can also train the up-and-coming workforce. After all, Corporate America has faced a mass exodus of experience as the population bubble we call baby boomers continues its march into retirement; the youngest boomers are now turning 50.

Attitude Adjustment

An AARP/Aon Hewitt report released in April found that the business case for workers who are 50+ has strengthened as the advantages of their experience and lower turnover rate offset their cost. In fact, the report found that—contrary to common perception—these workers do not cost significantly more than younger workers.

The report even found an increase in the recruitment of 50+ workers, and one of the incentives is a flexible, or transitional, retirement. This attitude shift could continue to support flex-retirement plans that have gained traction in the last decade. For example, few years ago, the federal government started a phased retirement program for its workers.

So, What Does Step-Down Look Like?

  •  You might cut back to working three or four days a week—enough to keep your insurance. You can then test your travel legs with longer weekends or extended vacations.
  • Your savings has more time to grow because you’re still collecting a high percentage of your full-time wage as you near or enter retirement age.
  • Working allows you to focus on more aggressive mortgage payments now if you’re still paying on your home loan so that you enter retirement mortgage-free. You might also opt to take on a paycheck-funded home project, upgrade your everyday vehicle, or buy that RV you have your eye on—big-ticket purchases that, if delayed until retirement, could strain a leaner budget.
  • You limit the sting of health care costs. For instance, retiring at age 62 may mean you'll have significant health care premiums to pay on your own until you reach age 65, when some of your medical costs will be covered by Medicare. The longer your employer helps cover the tab, the longer you won’t have to.
  • Even if your company doesn’t have a formal phased-retirement program, you may be able to negotiate your own deal. It can’t hurt to ask.

    Debate over Plan Contributions

    T. Rowe Price has built a trademarked philosophy around the idea that they call Practice Retirement. Their approach even includes reducing or stopping retirement-plan contributions to keep up income during career phase-down. That won’t make sense for everyone, however, as some advisers argue that it’s best to keep contributing at least to a 401(k) if you receive an attractive company match. To stop this contribution while still on the payroll equates to leaving money on the table, they argue.

    T. Rowe Price has crunched this example: suppose a 60-year-old couple has $500,000 in retirement savings and income of $100,000, and they've been saving 15% of salary in their 401(k) plans. As they look to semi-retirement:

    Option one: They stop retirement-plan contributions at age 62 but work full-time until age 66. During those four years, they could use the extra money to travel or engage in other retirement-type pursuits. At 66, they claim Social Security and start drawing roughly 4% from their retirement accounts. This would give them an annual retirement income of $67,900 and a savings balance at retirement of $665,400.

    Option two: The couple stops retirement-plan contributions at age 62, works part-time from age 62 to 70, and claims Social Security at age 70. Although their salary is reduced, the fact that they've stopped making contributions helps cover expenses. Because their Social Security benefits grow each year that they delay claiming, and they avoid tapping savings for an additional four years, their annual retirement income is $89,000. What's more, their savings at full retirement total $775,000—16% more than if they had both fully retired at 66.

    Don’t Forget Social Security

    Be mindful of your Social Security impact—it’s a double-edged sword. Starting at age 62, for each year that you postpone applying for benefits, you get 8% more per year in benefits, according to the Social Security Administration. That’s the good part. Here’s the catch: your Social Security benefits are based on average monthly earnings for your 35 highest-income years. Are you scaling back full-time work to a degree that will affect your benefits?

    The good news is that some (but not all) phased retirement plans come with protections that prevent the program from impacting Social Security at all. Before signing on, ask your human resources contact or financial adviser to clarify exactly how much Social Security will be affected. And if you do work while drawing Social Security, keep in mind that some benefits may be reduced.


    So, consider a step-down approach to retirement if it best fits your goals. Just don’t forget the big questions: Can I afford the slimmer paycheck right now? How will Social Security be affected? What about a hit to a 401(k) match? Insurance benefits? Phased retirement packages should clarify up front if the arrangement will impact health care coverage, and if so, whether an employee is eligible under the Consolidated Omnibus Budget Reconciliation Act, or COBRA.

    Retirement experts also say that even if your employer won’t play, there are steps you can take to “practice” retirement: cut expenses and try out a smaller budget.

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