Phasing Into Retirement
 Retirement day for most workers might be thought of as racing home from the job, screeching to a halt in front of their house, and never again getting into the work car. But some workers would prefer to take a more leisurely drive home by "phasing" into their retirement.
There is no official definition of phased retirement, but it is widely viewed as a way to segue into full retirement through reduced work hours such as part time, fewer days, consulting, job sharing, or a full-time schedule for a limited number of weeks.
Two out of five workers age 50 or older expressed interest in this concept, according to a recent American Association of Retired Persons (AARP) survey, though only one in five had even heard the term "phased retirement" before it was presented to them in the survey. Four of five workers interested in phased retirement said they would stay longer in the workforce if it was available, and one in three current retirees said they would have worked longer if phased retirement had been an option at their former employer.
The idea of phasing into retirement offers several benefits to workers. Commonly, retirees have returned to work because they hadn't saved enough to live on during retirement or they lack adequate health insurance until Medicare kicks in at age 65. Phasing into retirement allows workers to reduce the amount they need to save for full retirement, "practice" at retirement by living on a smaller income stream, and further build up their retirement accounts. It also allows them to either continue employer-sponsored health care coverage or earn enough income to pay for transitional private coverage.
Proponents of phased retirement see benefits for workers beyond just financial. Many workers receive important psychological, intellectual, and emotional rewards from work. It gives them a sense of self-worth. Some workers take the attitude of "retire and die" or "you rest, you rust," which is another common motive for retirees to return to work.
Another benefit of phasing into retirement is social. Colleagues comprise a social network for workers, sometimes off the job as well as on. Full-time retirees sometimes find themselves lonely and bored if they don't have other social networks.
Some observers have argued that without these psychological and social underpinnings of work, as well as the loss of structured time, retirees may actually suffer a physical decline. Consequently, easing into retirement provides the worker a better chance to find alternatives that will substitute for these benefits, such as new friends, new hobbies, new ways to find psychological rewards.
Despite potential benefits of phased retirement for workers, it is not available to many. A 1999 study by Wyatt Watson Worldwide found only 16 percent of large employers with formal phased retirement programs.
But a proposed change last fall in federal pension law by the U.S. Treasury Department could make phased retirement more common. The proposed new private pension rules would allow workers to phase into retirement and simultaneously begin collecting a portion of their benefits from their employer's defined-benefit pension plan-something workers couldn't do before. To be eligible, participants must be at least age 59 ½ and must reduce their hours at least 20 percent.
The proposed rules also deal with another major concern for workers thinking about phasing into retirement: its potential impact on the calculation of their pension benefits. Normally, traditional pension benefits (as opposed to payouts from a defined-contribution plan such as a 401(k)) are based on the number of years you work full time and the average amount of wages earned in the last years of work. Phased retirement could, consequently, reduce the amount that's paid out in monthly benefits or a lump sum.
The proposed rules require employers to treat the employee "in the same manner as if the employee were still maintaining a full-time work schedule." Nonetheless, workers phasing into retirement could still see reduced lifetime pension benefits because their years of service would be less or their average income would be less (the proposed rules prevent employers from taking both into account at the same time). Also keep in mind that workers often are forced to fully retire due to poor health or unemployment. So the better you can prepare yourself financially for retirement through savings, the more flexibility you will have whether you can phase into it or you're brought to a screeching halt.
Source
Source: The Financial Planning Association. (2005, June). Phasing into retirement. Financial Planning Perspectives (FPP). Available from http://www.fpanet.org
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