Phased Retirement: What it Means, How it Works

What Is Phased Retirement?

A phased retirement includes a broad range of employment arrangements that allow an employee who is approaching retirement age to continue working with a reduced workload, and eventually transition from full-time work to full-time retirement. Phased retirement may include a pre-retirement, gradual reduction in hours (or days) of work, then post-retirement, part-time work for pensioners who wish to remain employed. Part-time, seasonal, and temporary work or job-sharing are all work arrangements that can be a form of phased retirement.

Understanding Phased Retirement

The nature of retirement is changing, and many workers do not wish to experience a sudden end to work, followed by the equally sudden onset of full-time retirement. Instead, they wish to ease into retirement, transitioning out of the workforce with a reduced workload.

Phased retirement is seen as a benefit by many older workers, as it allows them to gradually ease into retirement while maintaining a higher income than they would receive if they quit work entirely. From the employers' point of view, phased retirement programs can be used to retain skilled older employees who would otherwise retire (especially in sectors where there is a shortage of entry-level job applicants), to reduce labor costs, or to arrange for the training of replacement employees by older workers.

Retirement in the 21st Century

In January 2024, Principal Financial released a study on retirement preferences that was conducted during 2023. The study found that 52% of current American workers would prefer to gradually decrease hours when it comes time to retire. Many employers will be happy that employees want to continue working. More than three quarters of employers survey (77%) say that the knowledge and experience of older employees is crucial to their success. However, employer policies don't seem to be aligned with these sentiments. Only 11% of small and midsized businesses report offering phased retirement programs.

"Phased retirement has no succinct definition," AARP noted in a white paper on the subject. "The term phased retirement often refers to a broad range of flexible retirement arrangements, both informal practices and formal workplace policies, which allow employees approaching normal retirement age to reduce the hours worked or work for their employers in a different capacity after retirement."

The AARP report cited these factors that are pushing workers to retire later:

Changes in Social Security have made it easier for recipients to continue working after reaching full retirement age without losing their benefits; Americans are living longer, which means that retirees will need greater financial resources to support themselves.

If you are claiming Social Security benefits before full retirement age, for 2024 you are limited to $22,320 in annual income before your benefits are reduced by $1 for every $2 earned above the limit. Within the year you will reach full retirement age, there is a higher limit and smaller deduction for exceeding it. In 2024 this limit is $59,520, and the reduction is $1 of benefits for every $3 dollars of income exceeding this limit. All deductions and limits stop in the month you reach full retirement age. From that point on, you can earn as much as you want without reductions in Social Security benefits. Thus, those waiting until full retirement age to claim Social Security benefits do not need to worry about this issue.

Phased retirement arrangements help businesses "maintain continuity of essential business operations by retaining key workers whose positions may be difficult to fill; enhance productivity by addressing the need for work-life balance; and reduce costs associated with hiring and training new employees."