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Ease on Down the Road to Retirement

You may have spent decades saving for retirement, waiting for the day when you could step back from long hours at work and do what you want with your time. But stopping work entirely can be difficult, especially if you love certain aspects of your job. Phasing into retirement — continuing to work part-time, even for just a fraction of your original salary — can provide the perfect balance and make a big difference in your retirement security. The option is increasingly popular: A 2023 survey by Principal Financial found that more than half of workers want to gradually reduce their hours before they eventually stop working.

Flexible retirement can look very different from person to person, depending on the semi-retiree’s preferences and career type. Some people retire from their full-time job and do consulting work in a related field or contract work for their former employer. Others switch to another type of work — taking a part-time job with a nonprofit or a business they’ve always been interested in, for example, or exploring flexible gig work.

Some others continue to work part-time for their longtime employer, and they may even get health insurance, participate in the 401(k) plan and receive other benefits if they work a certain number of hours each week. “A lot of companies are moving in that direction because there’s a benefit to keeping the institutional knowledge that long-tenured, loyal employees have,” says Judith Ward, a certified financial planner and thought leadership director for T. Rowe Price.

Ward knows about phased retirement from experience. After decades of helping clients prepare to retire, she wasn’t sure what she wanted to do next as she was approaching age 60 herself. “I was agonizing about not knowing what I would do in retirement, even though I knew I wanted to move in that direction,” she says. “I wanted to go part-time and have time to figure it out.”

Ward asked her employer about her options. She discovered that she could still qualify for employee health insurance if she worked at least 20 hours per week and that she could continue saving in the company’s 401(k), too. Last October, she cut back to working 2½ days each week, and she couldn’t be happier. “It’s more comfortable to work longer in this way than with the grind of full-time work,” says Ward, now 61. “It is a nice balance of work and exploring what happens when I stop work altogether. I can play pickleball on Fridays because I’m not working.”

Different forms of flexible retirement

Flexible retirement has taken a different form for some of her colleagues. Some work five mornings a week and take the afternoons off, while another colleague alternated months. “He would do project work, and then he’d be off for a month or two,” says Ward. “But when he was back, he would generally work five days a week in the office.”

Nearly two-thirds of large employers have helped their workers come up with a plan for phased retirement, according to Principal Financial, but smaller companies are less likely to allow the arrangement. If you work for a company that is willing to consider it, you may have a better shot at getting the terms you want if you approach your manager well before you’re ready to scale back. Ward recommends talking to your manager about a year before you’re planning to make the change.

Have a plan in mind before you discuss a potential transition so that you’re ready to explain how you can do your job part-time and continue to add value to the company. If your employer isn’t thrilled with the idea, you’ll have plenty of time to decide whether to continue working full-time or to think of another way to cut back, whether through consulting, freelance assignments or a part-time job with a different company. “Over the course of the year, you can try to network or have something lined up,” she says.

Ward also recommends talking with the human resources department to learn more about the impact on your benefits. Since she’s working half-time, she gets half her previous salary and must contribute more toward her premium for the health insurance plan. But health coverage is a valuable benefit until she qualifies for Medicare at 65.

Each employer’s requirements are different, so it’s important to nail down the details of any coverage that may be available.

Looking beyond your employer

If your employer doesn’t offer flexible retirement options, you could use your skills to do freelance consulting — setting the groundwork to build your business before you leave your full-time job — or take a part-time job in another field entirely. “I think that the changing nature of work has really helped retirees or those transitioning to retirement,” says Ward. “It has made that transition easier because remote and gig work are available. It adds to that idea of flexibility.”

To remain competitive, work on staying healthy and keep your job skills up to date, says Catherine Collinson, president and CEO of the Transamerica Center for Retirement Studies. “These factors can enhance one’s negotiating power to work and someday retire on their own terms.”

If you already have your own business, you can still find a way to cut back. Ed Emerman, 67, ran a small public relations agency in Princeton, N.J., for 30 years and had worked in corporate PR roles for 10 years before that. His wife, Wendy, 64, had a long career as a technical writer. After their grandson was born two years ago, the Emermans started thinking about retirement. “About a year ago, Wendy and I both decided it was time to either fully retire or reduce the number of hours we work each week,” Ed says. “We opted to try and phase into retirement, given that we both enjoy the work we do and weren’t sure we were ready to retire cold turkey.”

They approached Wendy’s employer and Ed’s clients to see whether they would be amenable to a reduced work week. “As it turned out, her employer and my clients were both very willing to accommodate our requests. They valued our services and wanted to keep us around, even at a reduced level.” Wendy’s employer let her stay on the company health insurance policy and continue contributing to her 401(k) even though she was working just two days a week.

The couple moved to Charlotte, N.C., to be closer to their daughter and son-in-law and enjoy the lower cost of living and warmer climate. They have more time to travel to Arlington, Va., to visit their other daughter, son-in-law and grandson, too.

“The arrangement has been terrific,” Ed says. “It has given us time to set up our new home near Charlotte, do some traveling, spend time with our grandson, play more golf and become involved in our active-adult community.”

After one year of phased retirement, Wendy decided to fully retire at the end of January. Her health insurance benefits ended, so Ed signed up for Medicare, and Wendy will continue her former employer’s health insurance through COBRA until she is 65 and eligible for Medicare, too. (COBRA is a federal law that lets you keep your employer’s health insurance for up to 18 months after you leave your job, but your premiums usually jump because your employer no longer helps pay the cost.) “It gives us peace of mind,” Ed says.

Ed still works two days a week for his PR firm. But, he says, “if I find myself wanting more free time, I will gladly take down the shingle and look back at my career in public relations with fond memories and no regrets.”

Jumping back in after a break

If you fully retire but later come back to the workforce, you’re part of another trend: unretirement. That’s what Donna Skeels Cygan wound up doing. Skeels Cygan, a CFP in Albuquerque, sold her financial planning firm in 2007 with a two-year noncompete clause in the contract. She worked for the company that bought her firm for one year, and after that she planned to retire and work on writing her book, The Joy of Financial Security. She didn’t think she would meet with clients anymore.

But her former clients kept asking her whether she’d work with them again. “I missed my clients so much that I went back with a business model that was very small,” she says. Instead of taking on as many clients as she had in the past, she focused on a few — not necessarily the wealthiest, but those she enjoyed working with the most. “I really worked hard on soul-searching about whether I wanted to come back and how I could come back without getting sucked into working 24/7 again,” she says.

She started her new company in 2010, sold it at the end of 2019 and worked with the new owner for two years to help with the transition. She retired in November 2021, when she was a few weeks shy of 64. Now she’s working on a second book — about personal finance for women older than 50 — and she writes a financial column for the Albuquerque Journal. She may eventually expand her writing career.

“None of this is concrete,” she says. “You need to stay flexible and look for opportunities that will keep you happy.”

Reaping the financial benefits

A phased retirement (or unretirement) can make a significant difference in your financial readiness for full retirement. According to surveys from the Transamerica Center for Retirement Studies, most people cite financial reasons for working past traditional retirement age, such as a need for additional income, or concerns about Social Security or inadequate savings, Collinson says.

Those who want to continue working in retirement also cite health and aging-related reasons, such as staying active, keeping their brain alert and having a sense of purpose, she says.

You can reap extra financial benefits if you know a few key strategies. “Not having to tap into your retirement assets for just a few more years, coupled with being able to delay Social Security, can be significant,” says Ward.

Consider the following five benefits to make the most of a phased retirement:

1. Preserve your retirement savings — and sock away even more.

Even if you earn much less than you earned from full-time work, the extra money can help minimize the amount you withdraw from your retirement savings for a few years, leaving more money to grow in your tax-advantaged accounts.

Continuing to contribute to your retirement savings can give you a leg up, too. You may still qualify to contribute to your employer’s 401(k) and receive an employer match. And you can contribute to a Roth IRA as long as you have earned income from a job. In 2024, people 50 and older can contribute up to $8,000 (or the amount you earned from working, if less). You can contribute to a Roth IRA for 2024 only if your modified adjusted gross income is below $161,000 if single or $240,000 if married filing jointly. If you earned too much to contribute to a Roth in the past, you may qualify after you partially retire.

You won’t get a current tax break for Roth contributions, but the money grows tax-free, and you won’t have to take required minimum distributions (RMDs) from the account.

2. Increase lifetime income by delaying Social Security.

The extra income you earn from working part-time can help you afford to delay claiming Social Security benefits, which could boost your monthly payout when you finally sign up.

Full retirement age is 66 for people born from 1943 to 1954 and gradually increases, by two months for each birth year, until it reaches age 67 for people born in 1960 and later. Claiming benefits at age 62 rather than your full retirement age can reduce your annual benefits by as much as 30%, depending on the year you were born. Another good reason to wait until at least full retirement age to apply for benefits: You can earn any amount of money without triggering the earnings test, which temporarily reduces benefits for those who have earnings above a specific threshold (more on the earnings test below).

If you wait past your full retirement age to claim benefits, your payouts get a boost. For each year you delay between full retirement age and age 70, your annual benefits will increase by 8%. “Not only is there a lot more of a benefit, but the annual cost-of-living adjustment is based on a higher base amount of benefit, so the growth of future benefits has a compounding effect,” says Mitchell Freedman, a CPA and personal financial specialist in Westlake Village, Calif.

“Being able to delay Social Security really is a big deal,” says Ward. “It’s an inflation-adjusted source of income that you’re going to have for the rest of your life.” 

3. Qualify for larger Social Security benefits.

The Social Security formula looks at average monthly earnings, adjusted for inflation, for the 35 years that your earnings were highest. Working a few extra years, even part-time, could replace years in the formula that you had little or no earnings.

That’s especially helpful for women who took some time off in the middle of their careers to raise their children, says Skeels Cygan. “When you look at my top 35 years, I have at least six years with $0 earnings when I was having our kids and decided to take some time off, and two years when I was studying to become a CFP,” she says. “Even if you’re working part-time, you can replace those zeroes, and that can be significant.”

You can check your Social Security earnings record by logging in to your my Social Security account online. You should also check your earnings record for errors that could lower the amount of your benefits. “It doesn’t happen often, but we’ve seen enough cases of an incorrect earnings history to recommend everyone check their records,” says Tim Steffen, director of advanced planning for Robert W. Baird & Co.

Tip: If you’re thinking about supplementing your income from a job with Social Security benefits, your benefits could be temporarily reduced. The earnings test affects individuals who claim benefits before they reach full retirement age and continue to work. In 2024, Social Security will withhold $1 of your benefits for every $2 you earn over $22,320. If you reach full retirement age this year, Social Security will withhold $1 for every $3 you earn over $59,520, but only up to the month you reach full retirement age. Once that happens, you can earn as much as you want without worrying about the earnings test. If you end up being subject to the earnings test — because you started claiming benefits at 62 while retired and then went back to work, for example — the forfeited benefits aren’t lost forever. Instead, your monthly benefit amount will be adjusted upward in the month you reach full retirement age to account for the benefits that were temporarily taken away.

4. Get health insurance before age 65 — at a reasonable price.

If your employer lets part-time workers continue to receive health insurance benefits, taking advantage of that can make a big difference in your finances if you stop full-time work before you’re eligible for Medicare. You may have to pay a higher premium than you did when working full-time, but it’s often a better deal than getting your own coverage in your sixties.

If your employer doesn’t offer health insurance, you can get a policy on the Affordable Care Act marketplace at HealthCare.gov or your state exchange (type your ZIP code at www.healthcare.gov to find your exchange). Because your income is likely lower than it was when you were working full-time, you may qualify for a significant subsidy to help with premiums. Estimate your costs and how much of a premium reduction you may get using the calculator at www.kff.org.

If you’re self-employed and have to buy your own health insurance, your premiums may be tax-deductible.

You can enroll in Medicare when you turn 65. But if you’re still working, even part-time, be aware of the high-income surcharge, also known as IRMAA. You may have to pay more for Medicare Part B and Part D if your modified adjusted gross income exceeds specific thresholds — more than $103,000 if single or $206,000 if married filing jointly on your most recent income tax return on file (which was generally your 2022 return when 2024 premiums were set). Most people will pay $174.70 per month for Medicare Part B in 2024, but high earners can pay from $244.60 to $594.00, depending on their income.

However, if your income has dropped since you filed your return because of certain life-changing events, including retirement from your full-time job, you can ask the Social Security Administration to use your more recent income when calculating your Medicare premiums.

5. Do a Roth conversion.

Skeels Cygan recommends that people in a phased retirement convert some money from a traditional IRA or 401(k) to a Roth IRA and use earnings from work to pay the taxes on the conversion. A Roth conversion can make sense when you scale back at work because lowering your income may reduce the amount of tax you pay.

The money you convert from a traditional IRA or 401(k) to a Roth grows tax-free and isn’t subject to required minimum distributions. You can withdraw money from the Roth without it increasing your modified adjusted gross income — and possibly incurring a Medicare high-income surcharge or raising your tax bracket in the future.

“I recommend that they do it over several years,” says Skeels Cygan. Because taxable conversions could make you subject to the Medicare high-income surcharge, the best time to do them is before the surcharge becomes a concern. And since the high-income surcharge is generally based on a two-year lookback, you may want to avoid or limit conversions once you reach age 63.

You can also use the extra money from a phased retirement to pay down debt and build your emergency fund, which becomes even more important after you stop working. And you can pad your travel fund — using the extra money to visit grandkids or go on a big trip, for example — without depleting your retirement savings.

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