The Benefits of Phased Retirement

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Until relatively recently, employees in the U.S. typically transitioned directly from full time work to full time retirement. That practice had at least four major drawbacks:

  1. Some employees wanted to stop working full time but for financial reasons felt a need to continue earning.
  2. Some employees found their work meaningful apart from the income it produced, and wanted to continue their employment – but not on a full time basis.
  3. Some employers wanted to retain skilled employees, for direct application of their skills and for mentoring their ultimate replacements.
  4. And, for government, when workers continue employment they typically require a lower level of government benefits and continue to pay taxes.

Flexible work opportunities for older employees allow two basic forms of phased retirement. For some, it allows them to move out of full-time work earlier, perhaps in their 50s. For others, it allows them to continue to work after the formerly conventional retirement age of 65. For employers, flexible arrangements can help in retaining desired employees and can provide an incentive for no longer desired employees to go onto a glide path to full retirement.

In a 2004 survey, the consulting firm Watson Wyatt (now Towers Watson) found that two-thirds of the 50-to-70 year olds they interviewed were interested in the possibility of a phased retirement and 25% were actually involved in some form of reduced work schedule. Watson Wyatt distinguished three groups: “planned phasers” (57%) who deliberately chose a part-time schedule to create more leisure time, “unplanned phasers” (32%) who retired fully but subsequently reentered the work force, and “forced phasers” (10%) whose full-time jobs were eliminated before they were ready to retire. Among the “planned phasers,” 42% reported that they worked mostly because they enjoyed it, 27% said they worked primarily because they needed the income, and 15% because they needed medical insurance.

According to a 2011 report  from Towers Watson, prior to the recent recession there was already a trend for older employees to retire later. Several factors influenced this trend. First, the combination of greater longevity and a progressive increase of the full retirement age for Social Security from 65 in 2002 to 67 in 2025 has made it economically prudent to work longer. Second, in 2000 Social Security eliminated the earning test for those who retired at full retirement age. This meant that Social Security benefits were not reduced because of earnings, so workers could receive employment income and their full benefit at the same time. Third, there has been a continuing shift away from employer-sponsored defined benefit plans, which had encouraged early retirement. Then, with the recession and the loss of value in 401(k) plans, older workers held onto their jobs as long as possible. Between 2006 and 2009 the average retirement age for both men and women increased by a full year.

At 31, after I finished residency training and a two-year post-residency fellowship, I started my first “real job,” supervising a 40 bed psychiatry unit. A colleague – Dr. Halim Mitry – who was in his early 60s, gave me avuncular advice: “Jim, this may sound strange to you, but you should start saving for retirement now. When the time comes you can think about what to do in retirement. But you won’t have much choice if you haven’t planned for the financial side.”

I didn’t realize it at the time, but Dr. Mitry had conveyed the complexities of retirement in three sentences. There’s the core financial component about how to support ourselves that requires careful planning. Then there’s a psychological component about how to make retirement a meaningful phase of life that also requires careful planning. I’m sorry I never got to thank my wise colleague for his generous guidance before he died.

With the ongoing recovery of the stock and housing markets, more over 65ers will be considering retirement and phased retirement. With careful policy and personal planning, phased retirement can be a win/win societal mechanism.

James Sabin, M.D., 74, is an organizer of Over 65 and a clinical professor of psychiatry at Harvard Medical School.

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