Phased retirement, its paychecks gain popularity

Dallas Morning News

DALLAS — Phased retirement, which allows workers to cut back their hours but still earn income, is a growing trend.

“It’s a program — formal or informal, or even self-created — to gradually ease into retirement, rather than doing a straight stop,” said Richard W. Jackson, a retirement planning counselor at Schlindwein Associates LLC in Dallas.

Phased retirement is getting a boost from the sluggish economy, as many people have discovered they can’t afford to retire as soon as they’d hoped.

“The economic situation has moved this to the forefront more than would otherwise have been the case,” said Cynthia Mallett, vice president for corporate benefit funding at MetLife.

But a phased retirement is not for everyone, and there are financial factors to consider in deciding whether you can afford to do this.

The primary financial benefit of taking a phased retirement is that you continue to get a paycheck, which can lessen the need to draw on your retirement savings, allowing the money to grow further.

On the other hand, when you reduce your work hours and salary, that could have a direct impact on your employee benefits.

“Go through every single benefit that you have, especially the ones that are tied to pay level,” said Alan Glickstein, senior consultant in the National Retirement Practice at Watson Wyatt Worldwide in Dallas, an employee benefits consulting firm.

Those benefits include:

ULife insurance, which is often tied to a multiple of your salary.

ULong-term disability insurance.

UPension and other retirement benefits, which are critical factors to look at when considering whether to retire gradually.

Those retirement benefits deserve special attention.

“There’s very little of anything in the rules that govern pensions and 401(k) plans that directly relate to phased retirement,” Glickstein said. But there is some guidance.

Federal law allows workers to start receiving pension benefits at age 62 — even if they’re working — instead of waiting until the traditional retirement age of 65.

If your employer permits this, you can take phased retirement and also receive your benefit.

But be aware that phased retirement could have an unwelcome impact on a pension.

Typically, pension payments are determined by a formula that factors in an employee’s years of service at a company and the average salary over the final years of his or her career.

If you’re in phased retirement in those years, your lower salary could prevent you from earning additional pension benefits, Glickstein said.

Your earnings in phased retirement also could reduce your Social Security benefits if you start collecting Social Security before you reach your full retirement age.

That’s because the government penalizes Social Security recipients who continue to earn income before their full retirement age.

Each year before you reach full retirement age, your Social Security benefit will be reduced by $1 for every $2 you earn over a set limit, which is $14,160 for this year.

In the year that you reach full retirement age, your benefits will be reduced by $1 for every $3 you earn over the income limit, which is $37,680 for this year. After you’ve reached full retirement age, the reductions cease.

If you’re thinking of reducing your work hours, determine first whether you’ll still be eligible for your employer’s health insurance.

Also ask if you’ll still be able to participate in your employer’s 401(k) plan if you reduce your hours.