Webster's Dictionary is always searching America's Lexicon landscape for words or phases that are becoming popular on their way to becoming permanent. "Phased retirement" is a term we have seen with more and more usage in recent years brought on by many factors such as a sour economy, longer life spans and members of the baby boomer generation rewriting the book on retirement.
Phased retirement is a catch all term for retiring by gradually decreasing work time instead of abruptly upon reaching retirement age moving to Florida to be full time on the golf course. Your client's decision to phase in retirement can be on his/her own terms or by necessity. That is, more and more retirement age people find themselves in a no choice situation to keep working because simply they can't afford to retire as soon as they'd hoped.
Others don't wish to clock from 95 mph to zero in one stop. They want to gradually move into full time retirement by continuing to work part time, do volunteer work or tackle hobbies left on the shelve during their full-time working years.
Either way, for advisors, if some of your clients' are considering a phased retirement you should be ready to brief your clients on some very different financial challenges that usually do not occur with the traditional retirement process.
Sure, the prime financial benefit of a phased retirement is that your client will continue to get a paycheck, which may lessen the need to draw on his or her retirement savings, allowing client money to grow further.
Conversely, when your client reduces work hours and salary, it could have a direct impact on your client's benefits at his/her company.
Here are a few considerations:
- Life insurance: May be tied to a multiple of client's salary
- Long-term disability insurance: Determine what affect a client who continues working has on this form of insurance
- Company health insurance: Check client's company health coverage to see if reducing work hours will affect eligibility
- Social Security: Phased in retirement could reduce benefits if client begins to collect SS before reaching retirement age and continues to work. (Each year before full retirement age is reached, the SS benefit will be reduced by $1 for every $2 your client earns over a set limit, which is $14,160 for this year. The year when your client reaches retirement age, it's $1 for every $3 earned to income limit of $37,680 for this year).
- Pension and other retirement benefits:
This is a critical area. Your client could be vulnerable if his/her company doesn't subscribe to letting employees receive pension benefits earlier. NOTE: Federal law allows workers to take pension benefits at age 62.
Typically, pensions are formulated by an employee's service years and salary during the final days of his/her last days of employment. You can see, by phasing in retirement, the lower salary could reduce an employee earning additional pension benefits. It's important to check this out with your client's place of employment.
What about your client's 401(k)? Will he or she still be able to participate if working hours are reduced to part-time?
As an advisor, you might have to be creative in long term prospects of your client considering both the extra income he or she would be receiving as a part-time working employee either at the original company or something unrelated and the long term effects on clients' pensions and other savings programs. Using your client's savings funds to increase their assets value in separate accounts or annuities might be good options as your clients' age.
As more and more companies consider the value of phased retirement, restrictions will undoubtedly loosen up. After all, not only does this reduce the compensation packages of long-term employees but also company sponsored 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). This can reduce labor costs or arrange training of replacement employees by older workers. While currently only 5 percent of midsize and large companies offer a formal phased retirement program, nearly 60 percent expect to develop one in the next five years, according to a 2008 survey by Hewitt Associates.
A growing consensus exists that the nature of retirement is changing. No longer do most workers wish to experience a sudden end to work, followed by an equally sudden onset of full-time retirement. Instead, many workers wish to ease in to retirement, transitioning out of the workforce with a reduced workload.
Our advice for financial advisors is to be alert to this accelerated trend of phased retirement and develop asset strategies to accommodate their clients' needs desiring this retirement lifestyle.
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