As you are nearing retirement, you might not want to completely withdraw from the workforce. More companies are beginning to implement phased retirement programs for their employees which would allow them to have a more balanced lifestyle while still remaining in the workforce part time. Transitioning into retirement rather than dropping cold turkey sounds like a promising idea however, there may be some hidden impediments that you should be aware of before you consider taking up a phased retirement program.
Although the specifics of the program vary by employer, the two main types offered are formal and Informal programs. Formal phased retirement programs have clear guidelines of the benefits and the effects on benefits stated within the parameters of the agreement. Informal programs on the other hand are mutual agreements that you come to with your employer, which may be open to change. Be careful with informal programs, you may need to do a little digging of your own. Depending on the program, phased retirement may hinder your benefits when you fully retire. Here are some ways your pension, social security, and health care benefits may be adversely affected and what you can do to avoid these risks.
The crucial factor of a pension is that the dollar amount is determined by a formula, usually based on earnings and years of service. A lot of pension plans depend on the last few years of employment. If those final years are spent with reduced hours and pay, your pension benefit in the long-run will also diminish. Therefore, before adopting a program, you should first determine how your phased retirement program will have an affect on your pension sum. If there could be a negative impact, an alternative option could be to collect the pension after quitting, and return to your job as an independent contractor or a part-time worker.
According to MyRetirement Paycheck by the NEFE, a worker’s prior earnings are recalculated in current wage terms. Average monthly earnings for the thirty-five highest income years determine your social security benefit. If you enter a phased retirement program which decreases your earnings, your social security annuities may be a fraction of what they could have been if you had retired from the get-go. Be sure to make sure whether your phased retirement working period factors into your social security distributions.
Reduced hours may leave you unqualified for health care that is offered by your company. When consulting a phased retirement program with your employer, determine whether you will be able to retain employer-sponsored health care benefits. If you plan to count on your employer’s health care, you may end up paying higher health care costs than you would have if you had completely retired at eligibility. On that account, it is important to ascertain what outweighs the other when transitioning into phased retirement; benefits of health care or the costs you would be paying to maintain it.
Companies that offer formal phased retirement programs tend to protect your pension, social security and health care benefits. On the other hand, if it is an informal program, you may need to discuss these benefits with your financial advisor or employer. Determining how these calculations, and others if any, may be affected and what actions you will need to take. As a result, when you are ready to consider phased retirement, you will be able to make an informed decision.
Are you currently in a phased retirement program? How has that worked out for you? What changes would you like to see with your employer’s phased retirement program, share your experiences with us in the comment section! Have other questions? Visit our forum!