Archive for September, 2010

Phased Retirement: The New Way to Retire in 2010

Sunday, September 19th, 2010

“Phased retirement” is a term we have seen with more usage in recent years brought on by many factors such as a sour economy, longer life spans and members of the baby boomer generation rewriting the book on retirement.

Phased retirement is a catch term for retiring by gradually decreasing work time instead of abruptly upon reaching retirement age and moving to Florida to be full time on the golf course.

Your decision to phase retirement can be on your terms or by necessity.  By necessity means many retirement-age people find themselves in a no choice situation to keep working because simply they can’t afford to retire as soon as they’d hoped.

Others don’t wish to clock from 95 mph to 0 in one stop.  They want to gradually move into full time retirement by continuing to work part time, do volunteer work or tackle hobbies left on the shelve during their full-time working years.

Either way, if you are considering a phased retirement you should be ready to face different financial challenges that usually do not occur with the traditional retirement process.

Sure, the prime financial benefit of a phased retirement is that you will continue to get a paycheck, which may lessen your need to draw upon your retirement savings, allowing your money to grow further.

Conversely, if you are a business owner or work for a company reducing work hours and salary could have a direct impact on your benefits.

Here are a few considerations:

•  Life insurance: May be tied to a multiple of your compensation

•  Long-term disability insurance: What affect will your continued employment have on this form of insurance?

•   Personal or company health insurance: Will reducing work hours affect your eligibility?

•  Social Security: Phased in retirement could reduce benefits if you begin to collect SS before reaching retirement age and continue to work.

•  Pension and other retirement benefits:

Typically, pensions are formulated by an employee’s service years and salary during the final days of his/her last days of employment.

You can see, by phasing in retirement, the lower salary could reduce an employee’s earning additional pension benefits.  It’s important to check this out with your place of employment.

What about your 401K?  Will you still be able to participate if working hours are reduced to part-time?

You need to investigate the difference between working part-time at your original company and the long-term effects on your pensions and other savings programs.  For instance, if you continue to work, using your savings funds to increase your assets value in separate managed accounts might be good options, as you get older.

As more and more companies consider the value of phased retirement, restrictions will undoubtably loosen up. While currently only 5 percent of midsize and large companies offer a formal phased retirement program, nearly 60 percent are expected to develop one in the next five years, according to a 2008 survey by Hewitt Associates.

A growing consensus exists that the nature of retirement is changing. No longer do most business owners or workers wish to experience a sudden end to work, followed by an equally sudden onset of full-time retirement. Instead, many self employed and company-employed workers wish to ease in to retirement, transitioning out of the workforce gradually with a reduced workload.