Should You Retire in “Stages”?
March 11, 2016
For many people, the concept of retirement can be scary, both emotionally and financially. If you, too, feel somewhat anxious about what awaits you, you might feel more comfortable in knowing that, depending on where you work, you might be able to retire in stages.
As its name suggests, retiring in stages typically involves reducing one’s work hours from full-time to part-time, and then, eventually, to complete retirement. If you enjoy the social relationships of work, and you define part of your identity with what you do at your job, this type of gradual transition may be easier for you to accommodate than the abrupt transition from “worker” to “retiree.”
As for the financial aspects of such a move, you will want to plan ahead. A “phased-in” retirement can affect your investment and income strategies in several areas, such as these:
• Social Security – You can start collecting Social Security as early as age 62, but your monthly payments will only be about 75% of what you’d get if you wait until you reach 66 (assuming that 66 is your “full” retirement age). And the payments get larger from there, until they “max out” at 70. So, if you had planned to retire at 62 but instead retired in stages, you could possibly afford to delay taking Social Security until your checks were bigger. You could work and receive Social Security, but if your earnings exceed a certain amount, some of your benefits may be withheld, at least until you reach full retirement age – after which you can earn as much as you want with no withholding of benefits. However, your Social Security could still be taxed based on your income.
• Required minimum distributions – During your working years, you may well have contributed to tax-deferred retirement accounts, such as a traditional IRA and a 401(k) or similar employer-sponsored plan. But once you turn 70?, you must start taking withdrawals (“required minimum distributions,” or RMDs) from these accounts. You can’t delay taking these payments, which are taxable. But if you did retire in stages and continued to work part-time, past when you expected to completely retire, you may be able to stick with the required minimum withdrawals at least for a while, rather than taking out larger amounts immediately. In this way, you could potentially keep more of your retirement funds growing in your tax-deferred accounts.
• Investment mix – If you planned to retire at a certain date, you might have created a specific mix of investments designed to provide you with sufficient income to last your lifetime. But if you continue to work, you may not have to rely so heavily on your portfolio – that is, your IRA, 401(k) and all investments held outside these retirement accounts – to help you meet your income needs. Consequently, during these extra years of work, you may be able to withdraw less from your portfolio, thus potentially having more assets to provide for your income needs down the road.
As you can see, a “phased-in” retirement could help provide you with options in making a variety of financial decisions. So, plan carefully before you exit the workforce – a gradual departure may be a good way to say “goodbye.”