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What Is Phased Retirement and Why Is It Important?

June 24, 2021

Employees may have tremendous information and experience as they approach retirement. They often have skills and institutional knowledge that can help guide their workplace and newer employees to succeed. Sometimes employers will implement phased retirement plans to keep older employees engaged as mentors and valued resources before they retire. In this article, we explain what phased retirement is, and why it's important for workforce development and morale.

What is a phased retirement?

Phased retirement is a formal or informal workplace arrangement where employees gradually transition into retirement. It often allows full-time employees of retirement age to work temporarily on a part-time basis while collecting a reduced salary and early pension benefits before retiring.

Phased retirement can help ease an employee into full-time retirement. Employers may offer phased retirement plans to eligible employees, and these employees may voluntarily apply for and accept the arrangement. An employee phasing into retirement often assumes a reduced work schedule and may take on an active mentorship role before retiring.

Related: Retirement Checklist: Everything You Need to Know

Why is a phased retirement important?

Phased retirement is important for several reasons:

  • It allows veteran employees to transition into retirement rather than making a sudden and permanent exit from the workplace. This could bolster workplace morale by giving older employees an outgoing purpose and provide the organization with extra time to plan for the future during this phasing stage.
  • It provides the workplace with reliable, part-time labor in the short term. These employees may have tremendous experience and institutional knowledge that benefits the workplace and its operations.
  • It helps create a transitional environment where the phasing employees may mentor and train newer employees before retiring, which could transfer and preserve institutional knowledge in the interim.

Related: How to Write a Retirement Letter: Tips and Example

How to implement a phased retirement plan for employees

Here are some steps in implementing a formal phased retirement system for eligible employees:

  1. Establish a formal employer-based program allowing your older workers to reduce their normal working hours as they transition into retirement, or provide an informal mechanism allowing your employees to ease into retirement.
  2. Establish rules and guidelines defining which employees are eligible for phased retirement. For example, you may limit phased retirement to full-time employees at least 55 or older and who have completed at least 10 years of service with your company or organization.
  3. Establish rules and guidelines defining the transitional period. For example, you may require the phasing employees to retire from employment within two years.
  4. Define the parameters of a reduced work schedule. For example, you may require the phasing employees who previously worked full-time hours to receive a 50% reduction in hours and salary until they retire.
  5. Consider knowledge transfer conditions. For example, you may require the phasing employees to train and mentor their replacements for 10 hours a week until they retire.
  6. Determine any effects on health care benefits. For example, you may provide phasing employees with a subsidy so that their health insurance rates are the same as if they were working full time.
  7. Determine any effects on pension or retirement benefits. For example, if the phasing employees receive employer-sponsored retirement benefits, you may subject them to a reduced monthly pension allowance or reduced retirement savings for working lesser hours under phased retirement.

Related: Understanding Early Retirement Packages

Informal phased retirement plan

Employers can also offer phased retirement plans based on informal arrangements. Here are some examples:

  • You can encourage and allow full-time employees approaching retirement to work a part-time schedule until they formally retire. This is an informal approach to phased retirement because it involves soft encouragement and no comprehensive program or policy in writing.
  • You may allow any full-time employees to retire after working decades of service and then rehire them for part-time work. This allows an organization to maintain and preserve institutional knowledge without establishing a formal phased retirement program.
  • If a highly skilled employee is looking to retire, you could offer that employee a phased retirement incentive to help persuade that employee to remain involved with the organization in a reduced capacity before retiring.

Benefits of a phased retirement plan

Here is why a phased retirement is often beneficial to employers and employees:

  • It may give older employees more free time to plan for post-retirement and more time to manage personal affairs away from work.
  • It may give long-time employees the dignity to remain connected to their jobs and workplaces before retiring.
  • It can often allow employers to reduce their payroll costs while investing in a new generation of employees.
  • It may represent a mutual agreement between the employers who offer a phased retirement plan and the employees who accept the terms and conditions of the arrangement.
  • It may allow phasing employees to receive employer-sponsored health care benefits while working part time.

Related: How to Set Retirement Goals: Steps and Tips

Challenges to phased retirement

Here are some challenges to implementing phased retirement:

  • Added health care costs: Employers who provide full health care coverage to part-time or phasing employees may face increased health care costs. That could prevent some employers from implementing a phased retirement plan.

  • Reduction in salary: Phased retirement reduces an employee's full-time annual salary to a diminished or part-time salary. Some employees may encounter financial hardship if they voluntarily accept the conditions of phased retirement, particularly if the plan doesn't include supplemental compensation or phased retirement annuity payments supplementing their lower salary.

  • Tax implications: The federal tax code has several nondiscriminatory provisions that might prevent certain employers from implementing phased retirement plans. For example, any employer with a highly compensated workforce may have difficulty establishing an equal and effective phased retirement plan that does not favor or provide highly compensated employees with disproportionate contributions or benefits.

  • Discrimination concerns: Legitimate concerns over age discrimination or disability discrimination could prevent an employer from implementing a formal phased retirement plan. Any phased retirement plan could face legal scrutiny if the plan favors skilled employees or restricts the eldest employees from applying.

  • Protection of pensions: Employers could have difficulty establishing a phased retirement plan that protects employee pensions. Some employees taking part in a phased retirement plan might receive diminished monthly pensions in retirement, particularly if the final salary or last three years of service impact their pension sizes.

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