Phased retirement softens impact of life changes

While you may be looking forward to some aspects of retirement, such as traveling or spending more time with loved ones, you may not be eagerly anticipating the potentially abrupt change from working full-time to planning your own days as a retiree.

To soften this transition, some baby boomers are exploring phased retirement, which enables individuals to gradually reduce work hours while maintaining pre-retirement income through a partial pension and a partial salary.

Baby boomer trend

A growing number of baby boomers is expressing an interest in phased retirements, partially because it would encourage them to work past their expected retirement age, according to a 2005 report from AARP.

Phased retirement and other alternatives that encourage workers to voluntarily remain in the work force longer benefit employers and employees. Employers retain their most experienced, skilled employees. Employees can boost retirement savings, accumulate additional Social Security benefits and continue working at reduced hours.

Other recent studies suggest that working longer improves physical health and emotional well-being. A 2005 study by Age Wave, Ameriprise Financial and Harris Interactive revealed five distinct emotional stages of retirement, including a reorientation phase where retirees reconcile the realities of retirement with their own expectations. The research uncovered a group of retirees, the “empowered reinventors,” who successfully addressed the challenges of reorientation through planning and preparation to achieve high levels of fulfillment and empowerment. More than one-third of this group was working full-time, part-time or cycling between periods of work and leisure.

Company permission

How do you create a phased retirement program for yourself? The first step is determining if your company pension plan allows it.

During phased retirement, most employees work part-time hours and receive full-time pay derived from part-time income and partial retirement payments. These payouts are called in-service distributions because workers receive them while they are still in service to their employers. Current law allows 401(k) plans and other profit-sharing plans to provide in-service distributions to qualifying employees. However, the Pension Protection Act of 2006 recently extended this legislation to traditional pension plans, which cover more than 44 million Americans – about 20 percent of employees in the private sector and about 70 percent of union workers, according to the 2005 Pension Insurance Data Book and www.aflcio.org.

Starting in 2007, the law will allow traditional pensions plans to permit in-service withdrawals to participants who are at least 62 years old. To find out if your pension plan intends to offer this option, contact your benefits department or plan administrator.

A second step toward phased retirement is working with a qualified financial adviser to help ensure that you have adequate savings and income during all stages of retirement. An adviser can help you evaluate your options and recommend ways to help you meet your goals and address your personal situation.

Paula Dougherty, CFP, ChFC, CLU is a Certified Financial Planner with Ameriprise Financial in Springfield. She may be reached at paula.j.dougherty@ampf.com.[[In-content Ad]]