How to Partially Retire Before You’re Ready For Full Retirement

Retiring in stages is becoming more of an option for those who don’t want to “jump off a cliff” from full-time work to having no employment.

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Lauran Madariaga, 69, was ready to retire in June from her job as a lead client service specialist at Mercer Advisors, a wealth management firm. Then her boss asked her to stay on part-time because he was having difficulty finding employees. 

Madariaga, who was already on track to collect her maximum benefit from Social Security, agreed to work 20 hours a week for two more months, postponing her retirement until right before she turned 70 on Sept. 1. 

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“I was ready to be done and free, but this is a good transition,” says Madariaga, of Silverado, Calif, who was happy to ensure a smooth adjustment for her clients. With her retirement savings in solid shape, the extra money was just a nice bonus.

For generations, retirement was seen as a binary state: Either you were working or you were retired. These days, though, necessity is pushing more people into phased retirements that ease employees out of the workforce in stages. 

A survey by global consulting firm Mercer found that 18% of U.S. respondents say they plan to transition from full-time to part-time work before fully retiring over the next year. That part-time work may be for a current or new employer or from self-employment. 

Phased retirements have long held appeal for employees because they can enjoy more free time without sacrificing earned income entirely. The transition can stretch a nest egg or allow more time for it to grow, an important feature when people are living longer and retirement can last 20 or 30 years.

Retiring in stages also gives people time to adjust psychologically. What’s new is that workers who want to retire gradually may find more support from employers, who have their own reasons to embrace phased retirements, especially in a tight labor market. 

Even with that support, other pieces of the phased retirement puzzle need to be in place for it to work. This is particularly true for younger retirees who aren’t eligible for Medicare and don’t want to file early for Social Security, which reduces benefits permanently. 

That means having access to private health insurance, adequate savings, little to no debt, and perhaps even a way to continue saving. 

But the key piece of the puzzle is the source of paid work. Without it, there is no phased retirement. 

The Idea Catches On at Companies 

 

The pandemic changed how people work, opening the door to phased retirements and other flexible ways of working. “We’ve learned people can work remotely, they can successfully telecommute, and they can work alternative hours,” says Catherine Collinson, chief executive officer and president of Transamerica Institute and its Transamerica Center for Retirement Studies. 

In fact, as employers scramble to fill jobs, Collinson believes phased retirement is becoming an employee retention tool. “Without it, retirement becomes an all-or-nothing proposition, and companies risk losing employees,” she says. 

“Phased retirement is the next demographic trend,” says Steve Parrish, co-director of The American College of Financial Services, adding that companies also are facing “the brain drain of the baby boomers who are retiring.” Employers are keen, he notes, to find ways to keep and pass on to a successor the institutional knowledge long-time workers have built up over years.

Even governments have an interest in keeping older workers employed, at least part-time, says Yvonne Sonsino, global co-leader of Mercer’s Next Stage, which studies companies and the aging workforce. When people don’t work anymore it affects every country’s tax base, “causing a massive cash flow issue,” she says. 

Informal Phased Retirement Plans More Common

 

Formal phased retirement programs are still rare, with only 6% of companies offering them, according to the Society of Human Resource Management. More common, especially with small and medium-size companies, is an informal plan negotiated between employer and employee.

But the idea is catching on. In a 2022 SHRM survey, 23% of respondents said they offered a formal or informal phased retirement program, up from 19% in 2018. 

Owens Corning, a manufacturer of construction material in Toledo, Ohio, is that rare company with a formal plan. It began in 2018 as a pilot program that made phased retirements available to U.S.-based salaried employees who are 55 or older and have worked for the company for at least five years. 

The program was launched in part because employees who wanted to retire were usually giving about a month’s notice before leaving, “and we ended up scrambling with how to transfer institutional knowledge,” says Paula Russell, Owens Corning executive vice president and chief human resources officer. 

Employees also were looking for a smoother transition that didn’t feel so abrupt. “We did hear from employees that they wanted a better way to retire that didn’t feel like jumping off a cliff,” Russell says. Owens Corning employees eligible for a phased retirement can reduce their hours with no loss of benefits, except for prorated vacation and salary. 

Typically, employees who want a phased retirement work the most hours at the beginning and decrease them as their successors come up to speed, says Allison Anderson, the company’s director of global benefits. The company caps the maximum length of a phased retirement at two years, with a year to 18 months the typical duration, Anderson says. 

“We didn’t want people to just linger and come in a day or two a week.” Employees who want a phased retirement must apply for the program and get approval from their superior and HR. About 20 employees have taken advantage of the program since 2018, with 10 more joining this year after it was advertised more widely through the company, Russell says. 

Making the Numbers Work 

 

Even though a phased retirement lets you bring home some income, it may not be enough to survive on, let alone enjoy your new-found freedom. Everything—savings, investments, pension plans, current income, potential future income and debt—needs to be assessed to determine whether a gradual retirement, or any retirement, is even possible. 

“If a person is contemplating a phased retirement now, they should consider getting rid of debt. Otherwise, their cash flow may be in jeopardy,” Parrish says. The exceptions may be mortgage and car payments, provided they aren’t too high. 

One of the stickiest points is the optimal time to take Social Security, which you can claim as early as age 62, though the amount will be reduced. 

“There’s a guaranteed increase for every year you wait after 62,” says Tyler Papaz, director of private wealth at Cornerstone, an asset management company in Bethlehem, Pa. “That’s very appealing when you compare it to the uncertainty of the market returns, especially the environment we’re in now.” 

Like Madariaga, you could wait until you’re 70 to collect the maximum benefit possible, but there’s no reason to delay after that age because the base payment won’t increase. Collecting Social Security early while working parttime also poses problems. 

Social Security will deduct $1 from your benefits for every $2 earned above $19,560 in 2022 if you are younger than full retirement age, which is about 66 or 67 years old depending on your birth year. 

The limit is more generous the year you turn your full retirement age, when you can earn up to $51,960. Those withheld benefits will be paid later, but it’s important to be aware of the temporary hit to that income if you’ll need it to live on during phased retirement, says Mari Adam, a certified financial planner with Mercer Advisors in Boca Raton, Fla. 

To avoid taking Social Security early altogether, you could withdraw some of your retirement savings from a 401(k) or an IRA, Adam suggests. That can be done without penalties at age 59½ for an IRA and, in some cases, age 55 for a 401(k). 

“I would say you’re better off, in most circumstances, taking a little bit of money out of your IRA or your personal savings and leave your Social Security as long as you can,” she says. 

If you tap retirement accounts, do it carefully so that you don’t jeopardize the long-term health of those savings. 

The cost of health insurance should be part of the calculation for when to claim Social Security. Medicare isn’t an option for anyone younger than 65. Until the passage of the Affordable Care Act in 2010, a phased retirement generally wasn’t feasible for most people younger than 65, but buying health insurance through the ACA health exchanges gives younger retirees access to a plan that covers preexisting conditions.

Even so, the insurance can be expensive, especially if it includes coverage for a spouse or family. Adam estimates a couple over 50 years old can easily pay more than $1,200 monthly. 

Staying on a company’s health insurance through COBRA for up to 18 months can help bridge the gap until Medicare, although that can be pricy, too. Under COBRA, you’ll pay the full cost of the health insurance and additional administrative fees. 

Gregg Zoroya, 68, of Arlington, Va., had to balance all of these factors when he was considering whether to retire from his job as a journalist at USA Today several years ago. He had worked there for 25 years and was more than ready to move on to another stage in his life. 

He had already published one book while juggling his job, “which was grueling,” he says. Although he was ready to start writing another, he wanted to retire from his full-time job first. Zoroya’s financial planner urged him to wait until he turned 70 to maximize Social Security benefits. 

“We clashed over it,” Zoroya says. “He kept saying, ‘You might live into your 90s, and you have to be solvent.’ But there’s also the issue of quality of life.” Zoroya and his wife Faye started crunching the numbers to determine how much he would forfeit in benefits if he claimed before age 70. They discovered the book contract would more than make up the difference. 

The financial planner got on board, and Zoroya took Social Security at 68. His wife will wait until she is 70 years old. 

There was one more obstacle, however—health insurance for Faye, who was on his health insurance plan. So Zoroya delayed leaving his job until his wife turned 65 and could collect Medicare. “That was the determining factor,” he says. “That made retirement possible.” 

Negotiate the Best Deal

 

One big advantage of a phased retirement is that you can continue building a nest egg. Although there is no age limit for contributing to an IRA, you do need earned income. Someone age 50 or older can contribute up to $7,000 to an IRA in 2022 or 100% of earned income, whichever is less. 

You also may be able to continue saving in an employer’s 401(k). In the past, companies could exclude employees from participating in the plan if they worked fewer than 1,000 hours a year, but the Setting Every Community Up for Retirement Enhancement Act of 2019 changed that. Now, part-time employees who have worked 500 hours a year for three consecutive years are eligible to participate. 

Depending on the plan’s rules, you may be able to continue contributing when you reduce your hours. If you plan to negotiate a phased retirement with your employer, it’s worth asking for everything you want, Parrish says, because many companies in their eagerness to retain people are proving generous. 

Even if you don’t plan to stay with the company, try to get the best deal possible. After announcing that he was retiring, Zoroya asked his manager for a buyout that previously had been offered to employees but was no longer available. Zoroya expected the answer would be no; instead, he got a yes. 

If your company doesn’t have an official phased retirement plan, ask colleagues who have negotiated their own partial retirement about their experiences, Collinson says. If a formal program exists, “look for colleagues who experienced it and learn about the journey and if there are unexpected pitfalls. Early in their careers, people are advised to get mentors, but we don’t often talk about retirement mentors.” 

No Short Goodbyes 

 

Phasing out of the workforce also eliminates the psychological whiplash that comes from leaving a long career abruptly. That’s particularly hard on people who don’t know how they want to spend their time in retirement or can’t spend it the way they had planned. It’s even harder on those whose identities are closely tied to their jobs. 

James Boylan worked as a gastroenterologist in private practice in Bethlehem, Pa., for more than 35 years before retiring in 2019 at age 73. “But I was kind of bored,” he says. 

It didn’t help that the coronavirus hit shortly afterwards, putting the kibosh on his travel plans. With a pandemic raging, he realized he wanted to keep his hand in medicine, not for the money but for the stimulation. 

“I really like to do medicine,” he says. “In my profession, if you don’t keep working, you lose a lot of your identity.” 

Boylan found a happy medium. Now he works about a day and a half a week in a friend’s practice and also as a locum—a temporary doctor—at a hospital in Medford, Ore. Boylan travels there for about a week every other month. The low-income area has doctor shortages, especially in specialities such as gastroenterology. 

“Working full-time felt like a grind,” he says. “Now I’m not running my own practice, and I don’t have to do it every day. I have a lot of freedom.” Zoroya, the journalist, says it was initially jarring “not to be part of a big news event. You’re in the game with what’s going on and then you’re not. But I have no regrets about the decision I made.”

Contributing Writer, Kiplinger's Personal Finance

Alina Tugend is a long-time journalist who has worked in Southern California, Rhode Island, Washington, D.C., London and New York. From 2005 to 2015, she wrote the biweekly Shortcuts column for The New York Times business section, which received the Best in Business Award for personal finance by the Society of American Business Editors and Writers. Her work has appeared in numerous publications, including The Times, The Atlantic, O, the Oprah Magazine, Family Circle and Inc. magazine. In 2011, Riverhead published Tugend's first book, Better by Mistake: The Unexpected Benefits of Being Wrong.