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Phased Retirement Programs

Phased retirement is a retirement option that lets employees work reduced hours for a period of time before full retirement.

With this option, retirement becomes a gradual process rather than an abrupt event. Both employers and employees benefit.

Learn about the reasons for phased retirement, the benefits, some barriers to address, and resources for more information.

Reasons for Phased Retirement

The baby boomers are moving closer to retirement. But will they retire like previous generations have? Labor analysts predict that they won't. Rather, fostering longer work lives will be desirable and feasible - for both the employee and the employer.

Why is this? There are three chief reasons for the growing interest in later-life employment options, including phased retirement.

• Labor and skill shortages will prompt more employers to attract and retain valued older workers. Why? The U.S. population is aging. The boomers are reaching traditional retirement age. Many will leave the work force and the population groups behind the boomers are not as large.
• Policymakers favor lengthening peoples' work lives. This means that workers continue to contribute to Social Security, which will aid the solvency of the Social Security system.
• 80% of workers tell AARP that they want or expect to work in retirement. They will work beyond the conventional retirement age.

The Two-Sided Benefits of Phased Retirement

When employees stay with their employers and can scale back their work hours, both sides benefit:

• Employers keep experienced, skilled workers who know the job and how to work effectively in the corporate culture.
• Employers can use phased retirees as mentors and trainers of new hires.
• Employees can avoid a discouraging search for new jobs that allow them to work fewer hours.
• Employees find the transition to full retirement easier.

Barriers to Overcome

AARP and other organizations are working on regulatory and legislative solutions to help remove these barriers to phased retirement:

• Many pension calculation formulas are heavily based on earnings in the final years of employment. Such formulas are likely to discourage participation in phased retirement programs.
• Restrictions in companies' own pension plans, as well as legal regulations, can constrain phased retirement programs. But re-design of the pension plan itself can remove many phased-retirement obstacles.
• It is desirable for phased retirees to supplement their part-time income with withdrawals from retirement savings accounts or pension plans. But some companies find it difficult to design phased retirement programs that allow this. Some companies with defined benefit pension plans allow active employees to make withdrawals from their accounts.
• Some companies would like to re-hire retired employees. To comply with ERISA (Employee Retirement Income Security Act), though, they must limit the number of hours retirees may work. Companies must also enforce waiting periods before rehiring retired employees.

Resources

Phased Retirement: Aligning Employer Programs with Worker Preferences - 2004 Survey Report
This Watson Wyatt survey reports what employees want and what employers can offer to keep their competitive edge.

Letting Older Workers Work
The Urban Institute's Retirement Project looks at how to change government and private policies to meet the needs of both phased retirees and employers.

Legal and Institutional Impediments to Partial Retirement and Part-Time Work by Older Workers
The Urban Institute looks at laws, regulations, and policies that govern employee benefits. Offers suggestions on how to avoid future labor shortages by inducing older workers to work longer.