Guide to Phased Retirement (With Benefits and Challenges)

An employee’s choice to retire can be an important decision both personally and for their employer. For example, some may struggle to imagine life without a full-time job, or organizations may worry about replacing an employee who has knowledge and skills that others may lack. However, there are options like phased retirement that may help improve this process, and learning more about this strategy may help decide if it’s a good option for you or your employer.

In this article, we define what phased retirement is, discuss its potential advantages and disadvantages, outline how to implement a phased retirement plan and offer tips on how to ask your employer to implement this process. 

Key takeaways:

• Phased retirement is an agreement that allows employees to transition slowly into retirement.

• Employees may benefit from this strategy because it continues to provide them with income and helps them adjust to stopping work.

• Companies may benefit from phased retirement because it allows the future retiree to train other employees about unique knowledge they may have.

What is a phased retirement?

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Phased retirement is a formal or informal workplace arrangement where employees gradually transition into full-time 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. 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.

Most employers offer formal phased retirement plans. However, some may allow for them based on informal agreements. Some examples of informal phased retirement plans may include:

• Encouraging and allowing full-time employees approaching retirement to work a part-time schedule until they formally retire

• Rehiring retired long-time full-time employees to return to the company to work as part-time employees

• Offering a highly skilled employee a phased retirement experience to continue working with the organization in a reduced capacity before retiring

Phased retirement is an important option to consider for helping to ensure a successful transition as an employee retires. For example, the retiree may mentor current employees to share institutional knowledge, preventing knowledge gaps after the employee leaves. Over time, this may help improve operations because employees have better knowledge. Phased retirement may also preserve good morale because the retiree continues to feel a sense of purpose within the organization.

Related: The 5 Career Stages and How To Succeed in Each

Benefits of phased retirement

Some potential benefits of phased retirement include:

Employee morale

Phased retirement may positively affect morale among all employees, including the retiree. For example, transitioning out of full-time work and into temporary part-time work may give the retiree a continued sense of purpose and foster their connection to your organization. Other employees may also feel better because this transition period helps provide them with resources to succeed in the future.

Related: How To Boost Employee Morale

Payroll costs

Using phased retirement may allow employers to better manage or even reduce payroll costs during the transition. This strategy allows the retiree to work less, typically transitioning from full to part time and requiring less money from payroll. However, this saves the organization money in the long term as it looks for new candidates to hire because it’s generally more cost-effective to pay existing employees than it is to hire new ones.

Related: 38 Cost-Saving Methods for Your Workplace

Health care benefits

While this may vary by organization, phased retirement typically allows the employee to continue receiving employer-sponsored health care benefits. However, the employer may still require them to satisfy certain requirements, such as working a specific number how hours each week. Some organizations may also continue to provide the employee with additional benefits, such as paid time off or other types of insurance, during the transition.

Related: Why Are Employee Benefits Important? Types and Advantages

Challenges to phased retirement

While phased retirement offers benefits, it may also present some challenges, such as:

Added health care costs

While employees benefit from the continued health care coverage, this may cost the organization more money. Employers may also pay higher costs to insure these part-time employees. However, costs may ultimately vary by plan, and some larger organizations may continue to pay lower costs because of the number of people with insurance.

Related: FAQ Employee Insurance Benefits

Reduced salary

Experiencing phased retirement reduces the employee’s full-time salary to a part-time salary or lower. This may feel frustrating for the employee or require them to adjust their personal spending habits during this time. However, they’re still able to earn some salary during this period, and many people plan carefully and save before retirement to prepare for this type of situation.

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 doesn’t favor or provide highly compensated employees with disproportionate contributions or benefits. However, organizations may consult with tax experts to better understand what could work best for them.

Discrimination concerns

Legitimate concerns over age discrimination or disability discrimination could prevent an employer from implementing a formal phased retirement plan. A phased retirement plan may face legal scrutiny if it favors skilled employees or restricts the eldest employees from applying. Organizations may consult with a legal expert to evaluate the potential risks of their policies, or they may help prevent discrimination concerns by aiming to create inclusive retirement policies.

Related: What Is Employment Law? (With Key Terms and Examples)

Protection of pensions

Employers could have difficulty establishing a phased retirement plan that protects employee pensions because Internal Revenue Service (IRS) may restrict how much someone receives based on what they earned, including during phased retirement. As a result, some employees taking part in a phased retirement plan might receive reduced monthly pensions in retirement, particularly if the final salary or last three years of service impact their pension sizes. However, providing employees with proper resources may help them make educated financial decisions.

Related: What Is a Pension Plan and How Does a Pension Work?

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. Determine which employees are eligible for phased retirement, such as full-time employees who are at least 55 years old and worked for the organization for at least 10 years, and write rules and guidelines communicating this. Define the transitional period through established rules and guidelines, such as how long the organization requires phasing employees to retire permanently and what the parameters of the reduced work schedule may be.

3. Consider knowledge transfer conditions, such as determining what training and mentoring requirements you want phasing employees to fulfill during the transitional period.

4. Determine how the phased retirement may affect health care benefits, pension plans or other retirement or employee benefits, and share these guidelines with the phasing employees.

Related: Understanding Early Retirement Packages 

Tips for asking for a phased retirement

As an employee, consider these tips to help you ask your employer for a phased retirement:

• Start the conversation early with your employer, and be sure to include the appropriate parties, such as a human resources manager and your direct manager.

• Present the phased retirement as a method to resolve an issue for the organization, and focus on how it may benefit the employer more than you.

• Explore your options for introducing flexible work methods into your job to best accommodate phased retirement, and share your ideas with your employer.

• Leverage technology to support your request, and be sure to learn any potential new technologies that may help you before you meet with your employer.

• Set new goals for yourself that help you define success as a retiree, and use these to help you present your request to your employer in a mutually beneficial way.

This article is for information purposes only and is not intended to constitute legal advice; you should consult with an attorney for any legal issues you may be experiencing.