Phased Retirement: Is It Right For You and Your Company?

A recent article in the Washington Post discusses the likelihood of phased retirement becoming more prevalent in the Washington, DC area over the next few years. As large numbers of baby boomers “age out” of the traditional full-time workforce, employers and employees alike must consider whether and how to retire. Phased retirement — a term used to describe any number of formal and informal arrangements in which employers allow their employees to leave gradually rather than abruptly — presents an interesting alternative to traditional methods.

But phased retirement, which can include anything from job-sharing to simply working fewer hours, presents difficult questions for employees and for companies in terms of health benefits and pension or 401(k) contributions. Employers must decide whether to only prorate salary or wages based on the number of hours employees in phased retirement programs end up working, or to decrease contributions to health insurance premiums, health savings accounts, and 401(k)s as well.

Many employees lost large portions of their retirement savings in the Great Recession, so those with individually-managed retirement accounts like 401(k)s may want to continue working longer than they had planned. On the other hand, workers with fixed pensions determined in part by how much money they earned in their last year or few years of work may find their financial interests better served by immediate full retirement even though they might otherwise prefer to continue working in a somewhat diminished capacity.

Although the legal issues surrounding health and retirement benefits in phased retirement merit careful consideration, the ultimate question for employers considering offering a phased retirement option — as well as for employees considering phased retirement — is whether both parties will gain from the arrangement.