Phased Retirement Can Help Smooth the Transition
In a recent survey, 52% of workers said they would prefer to gradually decrease their hours as they transition to retirement. The percentages were even higher for Gen X (67%) and millennials (56%).1
The federal government has offered a formal phased retirement program since 2014, allowing eligible full-time employees to collect half their pensions while working half time. Typically, at least 20% of their remaining work hours must be spent mentoring younger workers. And their pensions continue to grow based on part-time work.2
Private industry has been slower to adopt formal programs, with only 16% of employers — mostly larger companies — having regular phased retirement programs. However, 61% of companies have some experience with phased retirement, and — with strong employee interest — it’s likely that more will adopt formal programs.3
Win-win-win solution
A phased retirement program can be a positive experience for employees, employers, and customers.
For older employees, a reduced schedule offers a more gradual financial transition, maintaining a steady, if reduced, income that can help delay taking Social Security benefits and/or tapping retirement savings. Trying to live on 80% of salary, for example, might also be good practice for retirement budget management. And staying engaged in the workplace can offer mental and psychological benefits.
For employers, older workers provide experience and institutional knowledge that can help maintain and improve current quality while mentoring younger workers to help ensure a smoother transition to the next generation. Contrary to stereotypes that older workers are less productive, recent research found no correlation between age and productivity but a strong positive correlation between job tenure and productivity.4
For customers, older workers can provide dependability and continuity. In some cases, customers are also older, and long-time relationships can help maintain customer comfort levels.
Valuing Older Employees
Percentage of employers who agree completely or somewhat with the following statements.
77% Older employees’ company knowledge is crucial to our business’s success.
69% We want to keep good employees as long as possible but struggle to find ways to continually advance their career path.
67% We have plans for how employees nearing retirement can transfer knowledge to our business before they leave.
62% We are concerned with our employees’ career development.
55% We have hired people who had previously retired from another company.
55% We have asked employees who want to retire from full-time work to stay on part time.
47% We have asked employees who have retired from our business to come back for a specific need (temporary work).
44% We have asked employees who have retired to come back on a full- or part-time basis for the long term.
Source: The Principal Financial Well-Being Index, 2024 (survey conducted November 6–13, 2023)
Build your own program
If your company does not offer such a program, you might suggest an arrangement. Emphasize what you can continue to contribute and how it could help the company in the present and the future. But also be sure that the program will work for you. Here are some ideas to keep in mind.
- Make sure you understand the effect of reduced hours on your benefits, such as health insurance and employer pension or retirement plan contributions.
- Whereas the federal program includes a half pension with part-time wages, pensions are less common in private industry. If you cannot live on your reduced wages, you may have to use other sources of income, but you probably would not have to tap them as much as if you retired completely.
- One of the greatest benefits of phased retirement is that you could delay claiming Social Security, with your benefit increasing 8% annually after full retirement age (FRA), up to age 70. However, if you do claim Social Security before FRA and continue to work, you will receive a permanently reduced benefit for claiming early and be subject to the retirement earnings test, which may temporarily reduce your benefit payments until you reach FRA. Once you have reached FRA, the lost benefits from the earnings test will be added to your benefit amount.
If you phase out of your current job, make sure you don’t end up trying to do all of your former work in fewer hours. This could be especially problematic for salaried workers in project-oriented positions. Be sure you and your supervisor are clear on the requirements of your reduced workload.