Is a Phased Retirement Right for You?

As you start planning your dream retirement, it’s not uncommon to have some nagging second thoughts. Today’s current “unretirement” trend could certainly contribute.

If you are having doubts, you might want to consider giving retirement a “try out” through the offramp of a phased retirement. And there’s probably never been a better time: The “Great Resignation” has left many employers scrambling for seasoned talent, while remote and flexible opportunities have become much more commonplace.

Enter the phased retirement. A retirement typically involves leaving your job and never working another day in your life. But more and more people are making the transition more gradually, leaving full-time work, but still continuing to work part-time.

Phased retirement can be a great option, according to Andrew Weber, CFP^® professional and senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual. “You can continue to feel productive and appreciated, without the baggage of politics, stress and never-ending responsibilities that often accompanies full-time employment,” he says. “Part-time work allows you to do the things you enjoy and are good at, in a way that’s convenient and ideally is aligned to your purpose and goals.”

Weber also notes that even if you feel relatively confident about your retirement finances, extra money is liable to come in handy, especially in these turbulent economic times. Here are four reasons why you may want to consider a phased retirement.

Reasons you may want to consider a phased retirement

You can preserve your cash flow and current portfolio

Portfolio dips are a part of investing. And when they happen, it’s best to stay invested and ride out the downturn, if you can. While a financial plan can prepare you for this in retirement, if you’re concerned about starting retirement during a downturn, continuing to work part time can give you more cash flow, allowing you to avoid selling your investments now.

“When stocks and bonds have taken a dive, you can’t liquidate without losing value,” Weber says. While retirees expect to have a certain return from their portfolio, it’s vital to remember that these average returns consist of the combination of good and bad years. “If you sell in a bad year, you have to sell more to generate the income you need, which creates a larger hole to make up than if you can just wait and sell when the market recovers,” he explains.

That’s why it can be an enormous benefit to have some cash coming in to fund your day-to-day expenses or your “fun money” to preserve your retirement savings and keep you on a comfortable trajectory. “That income can make a huge difference in how fast and far your portfolio will recover,” Weber says.

You can delay Social Security and other benefits

You’ve spent a lifetime contributing to Social Security and you can claim your benefit as early as age 62. But waiting to claim Social Security benefits (up to age 70) increases your monthly benefit.

“It’s a guaranteed source of income that increases with inflation, which makes the adjustments over time more valuable the longer you delay claiming,” Weber says. “If you’re still working, you can offset more of your financial needs without tapping Social Security, and those who live past life expectancy will get much more out of Social Security by waiting until full retirement age to claim these benefits.”

At age 72, you’ll need to start taking required minimum distributions (RMD) from your tax-deferred accounts. However, if you’re still working, you may be able to roll over your savings into your current employer-sponsored plan. If that’s the case, you’ll be able to hold off taking RMDs from the plan until you retire. 

You may have more affordable choices for your health care coverage

Some part-time workers may be eligible for medical benefits through their company, and an employer-sponsored plan may be a better value than taking Medicare benefits. While everyone’s situation is different, Weber says it’s a good idea to compare plans and assess your situation to determine which option provides the best health care at the best price.

You can determine if you need to make adjustments to your lifestyle

No matter how ready you might think you are, Weber finds most people experience a major adjustment when that regular paycheck stops arriving in their account or mailbox. You will need to prepare yourself emotionally as well as financially. It’s not uncommon for expenses to change in retirement as you have more time to fill in your day. With a phased retirement, you get to test drive your new reality. “It’s a lot easier to get a sense of these financial factors when you still have some income coming in,” Weber says. 

All investments carry some level of risk including the potential loss of all money invested.

This publication is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.