Easing into Gradual Retirement

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Some seniors have little choice about their retirement dates. While it is unlawful to fire an employee because of age, businesses often invent excuses to terminate the employment of older workers. Some employees become less able to perform physically demanding jobs as they age. Employees who can no longer work in their customary occupations often elect to begin their Social Security payments at age 62.

Other seniors have more flexibility about their retirement. They might be fortunate to work for an enlightened employer that values their continuing contributions to a business. They might be self-employed and have the luxury of choosing to retire on their own schedule. They might also choose to become self-employed, as a consultant or in another occupation that makes use of their talents after retiring.

Transitioning to retirement offers advantages to seniors who are not ready to stop working. Delaying the receipt of Social Security benefits will usually increase the benefit the retiree eventually receives. Postponing full retirement also helps seniors stay connected to work they enjoy, while easing away from full-time work gives them more time to pursue leisure activities and reduces the physical and mental stress associated with a 40-hour workweek.

Moving in increments from full-time employment to part-time employment to full retirement requires planning. The New York Times recently interviewed financial planners who offer those suggestions for seniors who want to transition from work to retirement.

Estimate Social Security Benefits at Various Ages

Earnings will not reduce Social Security benefits for people who retire at their full retirement age (66 1/2 for most people). Seniors who want to reduce their workload gradually should consider how their earnings will affect their Social Security benefit. Seniors who can live on their reduced earnings will maximize the Social Security payment they receive in later years by delaying their receipt of Social Security until they reach full retirement age.

Even when seniors reach full retirement age, postponing the receipt of Social Security benefits for a few more years will result in a larger payment. Until age 70, the benefit becomes higher for each month during which a senior elects not to file for benefits. After turning 70, a senior who does not take Social Security benefits will be losing money. 

Seniors who plan a transition to retirement might want to estimate their earnings in each year until they reach 70 and decide whether to supplement reduced earnings with savings or with Social Security. Seniors can use a Social Security calculator to estimate the benefit that will be paid depending on their age when they apply.

Think About Retirement Plan Distributions

Distributions from a retirement account might ease the transition to full retirement. It might instead be better to let the account grow until the retiree stops working entirely. 

Don’t forget to think about the tax consequences of taking retirement account distributions. Most (but not all) retirement account distributions are taxable income. Adding distributions to earnings may place the senior in a higher tax bracket. Waiting to take distributions until after the senior stops working will often result in a tax savings. 

Seniors should also become familiar with the distribution requirements of their retirement plan. Retirees usually need to wait until they are 59 1/2 to take penalty-free distributions from a 401(k) plan. Most plans, including most IRAs, require retirees to begin taking a mandatory minimum distribution in the year they turn 72. Since plan requirements vary, it is important to understand the specific terms of each retirement plan in which a senior has invested.

Make a Plan

Any exercise in retirement planning should begin by defining goals. How many years do you want to continue working? How many hours per week do you want to work? What kind of work do you want to do? Are there other activities that might satisfy you more than working? When will you feel comfortable transitioning to those activities? Do you plan to remain in your family home as you ease into retirement or has the time come to downsize? Where do you see yourself living in the next five or ten years?

Seniors who are happy with their current job but want to work fewer hours will need to discuss their options with their employer. Some employers might be happy to keep a productive and experienced employee in the company, even in a less demanding role. Negotiating less work for less pay might be a satisfying option for an employer who doesn’t want to lose a valued resource and for an employee who is tired of the full-time grind.

Other seniors might want to transition to self-employment, taking on a consulting role with a former employer or searching for new clients. Of course, starting a new business might require an investment of time that defeats the senior’s goal of working less. It is also difficult to estimate future income from a new business. If earnings do not match expectations, a timeline for transitioning to retirement may need to be revised.

Still, the gig economy might offer seniors an opportunity for part-time or freelance work until they are ready to stop working entirely. Starting slowly, while the senior is still employed, allows a senior to build a reputation and client base before committing to freelance work. Seniors should also understand that deadline-driven freelancing might conflict with the desire to adhere to a less demanding schedule.

Get Advice

Seniors who have a good handle on their finances and the ability to plan for the future might transition to retirement without professional assistance. Seniors who have always left financial planning to a professional and those who are uncertain about their options might want to ask for advice.

The Times suggests hiring a certified financial planner who will work for a flat or hourly rate. Get independent advice. Investment advisors who manage your assets might give you good advice, but they might instead give you advice that maximizes their own commissions at your expense.

At the same time, the focus of planning a transition to retirement should be on maximizing the quality of life. A financial planner can help you understand the income and assets you might need to achieve your goals, but only you can decide upon the goals that will allow you to live a satisfying life as you ease into and achieve retirement. 

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