You Maybe Shouldn't Retire Gradually

Phased retirement might not be as good as it sounds for either your happiness or your wallet.

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When at the pool, some people like to do cannonballs right into the deep end, while others dip their toes into the water and inch their way into the shallow end. And so it goes with retirement. Some people like to walk away from their final day on the job knowing they will never work again. Others prefer to scale back their hours or switch to part-time or consulting work.

A gradual retirement is often thought to ease the transition from work to leisure, as it gives older workers time to shift their daily activities and social relations. But a new study from Boston College's Center for Retirement Research says phasing into retirement won't make you any happier, once you retire, than leaving the workforce "cold turkey." "It might make you happier while you're working, but once you're retired you won't be happier in retirement, in all likelihood, one way or the other," says Steven Sass, the center's associate director of research and a coauthor of the paper.

Here's why phased retirement might not be all it's cracked up to be.

It costs money to work. Working part time has many of the same expenses of full-time work, like commuting, professional clothing, dry cleaning, and lunches out. "It might have a lot of the same fixed costs as full-time work," says Alan Gustman, an economics professor at Dartmouth College. "You're just not bringing home as much pay." In addition to working fewer hours, your hourly rate could be reduced if you switch to part time. "Employers may not let [workers] stay on a job that generates the same wage rate with part-time work," Gustman cautions. And a different firm may not be willing to hire you as a part-time employee for the same wage you make at your current job.

You may need to start spending your savings. Some workers can't make enough money to cover their living expenses by working half time and must begin to dip into their pension, savings, or both. A worker who has reached age 62 can begin to receive pension distributions while still working, if the employer agrees, according to the Pension Protection Act of 2006. And employees who have reached age 59½ can also dip into their 401(k)'s and IRAs without paying a tax penalty. But that doesn't mean that workers should do either of these things.

"Working part time doesn't pay well except in very rare instances," Sass says. He recommends working until age 65 or 66 before even considering part-time work. "If you're doing it for money, you need to stay at this job full time and not touch your retirement assets, not touch Social Security, not touch a defined-benefit pension."

Phased retirement could affect your pension. Pensions are sometimes calculated based on earnings in the years just before retirement. So, an older person who chooses to work half time at half pay could, in some cases, lose as much as half of all future pension benefits, according to Robert Hutchens, a professor of labor economics at Cornell University.

You'll want to check your company's rules before taking a position at lower pay. "If somebody thinks they have more than enough retirement wealth, it might be in their best interest to start their pension and still continue to work," says Bill Miner, a Watson Wyatt senior retirement consultant. "If you're not so confident, maybe the best thing is to continue to work full time and to continue to save and accumulate retirement wealth."

You might lose health coverage. Not all companies offer health insurance to part-time employees, and it's hard to find affordable health insurance on the open market between age 50 and when Medicare kicks in at age 65. Hutchens found that 55 percent of companies say they would either drop health insurance coverage for employees who switch to part-time work or provide insurance coverage gauged to the number of hours worked. Some firms also charge part-time employees higher health insurance premiums.

It's not for underachievers. If you're not so crazy about your job, it's fun to dream about working only half as much while still being able to pay your bills. But companies are selective about whom they let phase into retirement. Most businesses don't have formal phased-retirement programs, and part-time schedules are typically negotiated on an ad hoc basis between individual employees and management. Opportunities for phased retirement tend to be greater for older high-performing workers with long job tenures, Hutchens says.