There are many reasons for phased retirement, that is, stepping down to less hours rather than quitting all at once.
The main advantage is that it allows you to continue saving for full-time retirement.
By delaying, in part, you are able to continue contributing to your IRA or 401(k).
There aren’t any age limits for contributing to an IRA, but you must have earned income.
For example, if you are age 50 or older, you can contribute up to $7,000 to an IRA in 2022 or 100% of earned income, whichever is less.
You may also be eligible to continue saving in an employer’s 401(k).
Employers used to be able to exclude employees from retirement plans if they worked fewer than 1,000 hours a year. With the passage of the SECURE Act of 2019, part-time employees who have worked 500 hours a year for three consecutive years are eligible to participate.
Ask for a deal
Depending on your 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. This is because many companies in their eagerness to retain employees are being generous.
Even if you don’t plan to stay with the company, try to get the most favorable deal possible. If your company doesn’t have an official phased retirement plan, ask colleagues who have negotiated their own partial retirement about their experiences.
If a formal program exists, ask colleagues who have experienced it and learn about the journey and any unexpected pitfalls.
Phasing out of the workforce also eliminates the psychological whiplash that comes from abruptly ending a successful career. It’s especially difficult for people who don’t know how they want to spend their time in retirement.
Continuing to work part-time at your current company or working for a friend’s business could keep you working to take advantage of both worlds.