For most of our adult lives, many of us have had one destination in mind: retirement. However, thinking about it in the abstract and being faced with it in reality is completely different.
The concept of retirement has evolved over the years, along with options for retirement savings. Our parents and grandparents might have participated in pensions and relied on Social Security as their primary income when they retired in their 60s. Now, corporate pensions have mostly disappeared, and, thanks to modern medicine, we’re living longer.
As life continues to evolve, people are embracing the idea of “phased retirement.” This new concept allows people to ease into their golden years, both financially and emotionally.
Phased retirement is a formal or informal workplace arrangement where employees gradually transition into retirement. It often allows full-time employees of retirement age to work temporarily on a part-time basis while collecting a reduced salary and early pension benefits before retiring. (Source)
Phased retirement helps accomplish two important goals:
- Provide supplemental income for retirees who may not have saved enough to stop working completely.
- Provide emotional benefits of slowly shifting from a “career” focus to a retirement focus.
Let’s take a look at both.
The financial reasons for a phased retirement are simple. As we work and build our nest egg, we must convert the savings into a stream of income to support us during retirement. As mentioned earlier in the article, pensions used to provide a reliable, guaranteed source of income but no longer are prevalent for workers.
The transition from pension-based retirement packages to 401(k)s shifts the responsibility of saving from the employer to the employee and, sadly, most employees don’t save adequately to secure a stable retirement.
A phased retirement isn’t aimed at completely replacing the income needs in retirement – it supplements it. This keeps retirees from spending down their nest egg too early in retirement which can have huge benefits in their later years.
It can also have a big impact when it comes to collecting Social Security benefits. According to CNBC, “While many people start collecting reduced benefits at age 62, 100% of the benefits kick in at age 67, for those born in 1960 and later. If you push receiving Social Security back to age 70, the benefit jumps to 124%.” By working a little longer, even at reduced hours, retirees can potentially hold off on collecting those benefits, which can make a big difference when it comes to income as a full retiree.
Emotionally Adjusting to Retirement
While the financial benefits of phased retirement are obvious, the emotional and mental advantages may not be as apparent.
As human beings, identity and purpose are two of the core meanings of living a fulfilled life. For most people, their career becomes a big part of their identity and purpose, and it can be very hard to let go of when retirement is on the horizon.
Just as you plan financially for retirement, having a gameplan for the emotional and mental stresses of this big life change is also important. As financial advisors, the first question Denver Private Wealth Management asks clients when preparing for retirement is, “What are you looking forward to doing in your golden years?”
If a client is unable to answer that question, they might not be ready to retire; they’ve spent decades as a doctor, lawyer, consultant, etc., and it can be hard to relinquish that part of their identity.
That’s when a phased retirement might be considered.
This allows people to slowly adjust to having more time back in their days and gives them the opportunity to explore other options. Whether those options are hobbies, volunteering, etc, without suddenly giving up the profession that has become a big part of their life.
What’s the Right Answer for YOU?
Retirement planning is unique for everyone – and not just financially. It’s not a destination, but the start of a new journey. It’s important to consider what will make you feel happy and secure, both financially and emotionally. As an impartial third party, we’re here to answer your questions and help you make a decision that’s right for you.
Denver Private Wealth Management is an independent fee-based financial planning practice with 80+ years of experience in the financial industry. DPWM customizes portfolios based on your financial goals and works closely with you, your tax advisors and estate attorneys to form a comprehensive view of your financial situation. For more information or to set up a free consultation, contact us at email@example.com.
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