Phased Retirement – Not as Simple as It Sounds

retirementThe concept of phased retirement originated in Sweden in the 1970’s and quickly made headway in the U.S.  A phased retirement program offers options for employees approaching retirement to reduce work days or hours, and therefore transition to full retirement.

According to a 2010 AARP and SHRM study, 20% of U.S. employers had programs in place or were evaluating them at that time.  Eligible Federal employees can partially retire and still work part-time under a program enacted in July, 2012.

A phased retirement program could allow employees to move to part-time work and retain certain benefits.  Many employers customize solutions to each individual, such as a 10% pay cut in return for extra vacation weeks.

Employer Benefits

There are many benefits to employers who implement a phased retirement program, including:

  • Replacement training and transition coverage
  • Continuity of client and customer relationships
  • Junior staff mentoring

Employers get to keep seasoned employees on to avoid worker shortages, particularly in the fields of public utilities, health care and national defense contractors.

Employee Considerations – Financial

Employees weighing the advantages of a phased retirement must consider the financial implications carefully.  A Human Resources representative should analyze and explain the impact on each company benefit of reducing work hours.  Here are just a few:

Health Care.  If the employee is already age 65, Medicare would pay for medical expenses.  If not, the employee may lose health care coverage if the plans do not cover part-time employees.  Discuss health care plan eligibility and COBRA options.

Pension.  If the defined benefit pension calculation is weighted towards final years of service, the benefit could be reduced if earnings in those years are lower.  There also could be a benefit reducing effect if the employee earns less than full years of service.  The employee may not receive any service credit if working less than 1,000 hours per year.  Check with your plan administrator to assess the full impact of reduced hours and  earnings.

401k401(k).  Taxable in-service withdrawals are possible, but the employee may have to pay an incremental 10% tax if under age 59 ½.  Reduced earnings means 401(k) reduced savings, and a lower employer match, which may even be eliminated if the plan requires a minimum number of hours to be eligible.  Your plan administrator can determine the impact on each individual.

Social Security.  Lower earnings years may reduce Social Security benefits.  Also, the employee should be aware of the SS earnings limit while collecting benefits, if under the full retirement age.  The Social Security website has a wealth of information on this topic.

Employee Considerations – Social and Emotional

In addition to financial implications, there are many social and emotional issues for employees to think through before deciding on a phased retirement.  This is particularly true for those in high-level positions.

Diminished Status.  An employee working part-time may not have the same managerial responsibilities or high-visibility as when full-time.  He must decide if he is willing to work under these changed conditions, which may also include a different job title.

Reduced Support.  Administrative support and even an office may not be available.

Exclusion.  Because of the nature of his changed responsibilities, the employee may be excluded from normal decision-making and confidential discussions, as well as regular meetings.

Reach Out for EAP

If an employee is struggling with the stress of opting for phased retirement, or with its social and emotional effects, be sure to remind his manager of the availability of your Employee Assistance Plan for counseling.

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