Virtually every survey of American workers finds the majority would like to ease into retirement, perhaps working part time for a few years before calling it quits completely. The problem is, corporate America has been slow to embrace the phased-retirement concept.
But that could be changing.
The nation's largest employer, the federal government, on Nov. 6 began accepting applications for phased retirement. While the rules apply only to federal workers, they could serve as a pilot project for the private sector.
Federal employees who are eligible for phased retirement based on their age and years of service can continue to work part time if they receive approval from their agency.
During phased retirement, employees will be paid for part-time work, supplemented by a partial annuity, and will continue to accrue additional service credits toward their final annuity.
The employees also will spend 20% of their time mentoring younger workers.
“Phased retirement offers an innovative alternative to traditional retirement for the 21st century,” Katherine Archuleta, director of the Office of Personnel Management, said in announcing the program. “It provides a new tool that allows managers to better provide unique mentoring opportunities for employees while increasing access to the decades of institutional knowledge and experience that retirees can provide.”
POPULAR WITH WORKERS
The idea of easing into retirement is popular with workers. A 2014 survey of more than 4,100 private sector workers conducted by the Transamerica Center for Retirement Study found nearly two-thirds of participants “envision a phased transition into retirement during which they will continue working, reduce hours or work in a different capacity that is less [stressful] and/or brings greater personal satisfaction.”
Unfortunately, the idea has not exactly caught fire with businesses.
“Few employers have practices and programs in place to facilitate a phased retirement,” the report said.
Just 21% of workers 18 and older interviewed for the Transamerica survey said their employers enable them to reduce work hours and move to part time from full time.
An even smaller percentage, 14%, said their employers enable workers to take positions that are less stressful or demanding.
“The implication for workers is that a phased transition into retirement may require changing jobs employers if their current employer does not accommodate them,” the report concluded.
If successful, the federal program could lead to broader acceptance of phased retirement. In the meantime, some companies will continue offering phased-retirement arrangements to valued employees on a case-by- case basis.
Financial advisers can play a vital role in helping clients evaluate the pros and cons of such arrangements. They may even be inspired to set up a similar situation when they create their own succession plans.
FACTORS TO CONSIDER
One of the important factors to consider in moving from full-time to part-time work is the impact on employee benefits.
In some cases, it may make more sense for an employee to resign in order to access earned retirement and retiree health benefits, and then establish a consulting arrangement with an employer.
Pensions. A lower salary could hurt workers covered by traditional defined-benefit pension plans if the plan benefit formula is based on average salary during the final years of work. But the Pension Protection Act of 2006 lets people receive pension distributions while working part time.
401(k)s. There's no early withdrawal penalty when tapping 401(k) plans after age 591/2, but distributions are taxable. Part-time employees might no longer be eligible to contribute to an employer's retirement savings plan or qualify for matching contributions.
Health insurance. Part-time employees may lose access to employer-provided health coverage. That might be less problematic now that most Americans have greater access to insurance through federal and state health exchanges. Employees eligible for Medicare could end up saving money.
Social Security. Social Security retirement benefits are based on a worker's highest 35 years of average indexed earnings. Depending on earnings history, benefits could be affected by cutting hours in the final years of work.
Eligible individuals can collect reduced retirement benefits as early as 62, but benefits claimed before full retirement age are subject to annual earnings limits. Workers collecting before full retirement age lose $1 in benefits for every $2 earned over $15,480 in 2014. The limit rises to $15,720 next year.
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