Many people approaching retirement age are justifiably concerned about how long their savings will last. One strategy that can help extend the life of your savings, while easing some of the emotional strain associated with leaving the workforce, is phased retirement. This is a gradual shift from full-time work to part-time or freelance work - and ultimately to full retirement.

Phased retirement allows you to enjoy additional leisure time while gaining significant financial benefits. But it is important to plan carefully to make the most of those benefits and avoid potential pitfalls, such as losing health insurance coverage or retirement plan matching funds.

Financial advantages

Working longer via phased retirement may offer the following financial benefits:

Continued Retirement Plan Contributions

Delaying retirement allows you to continue building tax-deferred savings in IRAs and employer-sponsored retirement plans, such as 401(k)s, provided you continue to be eligible. The SECURE Act, passed in late 2019, eliminated the age limit for contributions to traditional IRAs (for 2020 and later). So, if you have earned income from a job or from self-employment and otherwise qualify, you can continue making pre-tax contributions to an IRA, even if you are over 70½.

Deferral of RMDs

You are generally required to begin taking required minimum distributions (RMDs) from traditional IRAs and 401(k)s by April 1 of the year following the year you turn 72 (70½ if you reached 70½ before January 1, 2020).

Related Read: For Good Financial Health, Take Your RMDs

However, you can defer RMDs from your current employer's 401(k) plan and allow the funds to continue growing until you retire if:

  • You continue working past age 72;
  • Your plan permits such deferral; and
  • You do not own five percent or more of the company.

This benefit is not available for non-Roth IRAs or for a former employer's 401(k) plan, but it may be possible to defer RMDs by rolling those funds into your current employer's plan.

Enhanced Social Security Benefits

If the income from your job and other sources are sufficient to cover your living expenses, you might want to delay social security benefits to age 70. This allows those benefits to grow by around eight percent per year, maximizing your monthly payments once you start receiving them.

Working longer also gives you more time to pay down mortgages and other debts while preserving your retirement savings and taking advantage of employer-provided health care and other employee benefits as long as possible.

Related Read: Considerations Before You Begin Social Security Benefits

Steps to stepping down

If you are contemplating phased retirement, take a personal inventory by gathering information about your assets, liabilities and income sources (now and in the future). Are they sufficient to last through your expected retirement years? If you cut back your work hours, will you be able to cover your living expenses without tapping your retirement savings or social security? If not, one option to consider is ceasing contributions to IRAs and employer retirement plans. But if that means giving up matching contributions, do not miss a valuable opportunity to grow your retirement savings.

Also, learn about your employer's policies. Is phased retirement even an option? Some employers have formal phased retirement programs, while others are willing to negotiate these arrangements on a case-by-case basis.

Despite the benefits to the employer - including retention of experienced workers, mentoring of younger employees and preservation of institutional knowledge - phased retirement has not received wide attention. If your employer does not offer phased retirement (and you can live without the benefits), you might explore other options, such as a part-time job with another employer or freelance or contract work.

Finally, assess the impact of going part-time. How might reducing your hours affect your eligibility for retirement plans and other benefits? For example, it may reduce pension benefits that are based on your most recent earnings. Many employers limit certain benefits - such as health insurance, 401(k) plans and matching employer contributions - to employees who work a minimum number of hours. Of course, losing health coverage is less of an issue if you are eligible for Medicare or if you are covered under your spouse's plan.

Going through a phase

Phased retirement can help your retirement dollars go further by increasing the size of your nest egg and delaying the time you need to start using it. ORBA's financial advisors can help you assess your unique situation, determine the financial impact of reducing work hours and help you position yourself for a comfortable retirement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.