To make your savings last, consider phased retirement
Cash Flow and Retirement
Many people approaching retirement age are justifiably concerned about how long their savings will last. One strategy that can help extend the life of your savings, while easing some of the emotional strain associated with leaving the workforce, is phased retirement. This is a gradual shift from full-time work to part-time or freelance work — and ultimately to full retirement.
Phased retirement allows you to enjoy additional leisure time while gaining significant financial benefits. But it’s important to plan carefully to make the most of those benefits and avoid potential pitfalls, such as losing health insurance coverage or retirement plan matching funds.
Working longer via phased retirement may offer the following financial benefits:
Continued retirement plan contributions
Delaying retirement allows you to continue building tax-deferred savings in IRAs and employer-sponsored retirement plans, such as 401(k)s, provided you continue to be eligible. The SECURE Act, passed in late 2019, eliminated the age limit for contributions to traditional IRAs (for 2020 and later). So if you’ve earned income from a job or from self-employment and otherwise qualify, you can continue making pre-tax contributions to an IRA, even if you’re over 70½.
Deferral of RMDs
You’re generally required to begin taking required minimum distributions (RMDs) from traditional IRAs and 401(k)s by April 1 of the year following the year you turn 72 (70 ½ if you reached 70 ½ before January 1, 2020). However, you can defer RMDs from your current employer’s 401(k) plan and allow the funds to continue growing until you retire if:
- You continue working past age 72,
- Your plan permits such deferral, and
- You don’t own 5% or more of the company.
This benefit isn’t available for non-Roth IRAs or for a former employer’s 401(k) plan. But it may be possible to defer RMDs by rolling those funds into your current employer’s plan.
Enhanced Social Security benefits
If the income from your job and other sources is sufficient to cover your living expenses, you might want to delay Social Security benefits to age 70. This allows those benefits to grow by around 8% per year, maximizing your monthly payments once you start receiving them.
Working longer also gives you more time to pay down mortgages and other debts while preserving your retirement savings and taking advantage of employer-provided health care and other employee benefits as long as possible.
Steps to stepping down
If you’re contemplating phased retirement, take a personal inventory by gathering information about your assets, liabilities and income sources (now and in the future). Are they sufficient to last through your expected retirement years? If you cut back your work hours, will you be able to cover your living expenses without tapping your retirement savings or Social Security? If not, one option to consider is ceasing contributions to IRAs and employer retirement plans. But if that means giving up matching contributions, don’t miss a valuable opportunity to grow your retirement savings.
Also learn about your employer’s policies. Is phased retirement even an option? Some employers have formal phased retirement programs, while others are willing to negotiate these arrangements on a case-by-case basis.
But despite the benefits to the employer — including retention of experienced workers, mentoring of younger employees and preservation of institutional knowledge — phased retirement hasn’t received wide attention. If your employer doesn’t offer phased retirement (and you can live without the benefits), you might explore other options, such as a part-time job with another employer or freelance or contract work.
Finally, assess the impact of going part time. How might reducing your hours affect your eligibility for retirement plans and other benefits? For example, it may reduce pension benefits that are based on your most recent earnings. And many employers limit certain benefits — such as health insurance, 401(k) plans and matching employer contributions — to employees who work a minimum number of hours. Of course, losing health coverage is less of an issue if you’re eligible for Medicare or if you’re covered under your spouse’s plan.
Going through a phase
Phased retirement can help your retirement dollars go further by increasing the size of your nest egg and delaying the time you need to start using it. Your financial advisors can help you assess your unique situation, determine the financial impact of reducing work hours and help you position yourself for a comfortable retirement.
Sidenote: Should you enroll in Medicare?
Some Americans aged 65 and older who continue to work and have work-based health insurance aren’t sure about whether they need to enroll in Medicare. Medicare rules are complex, but here’s a basic overview.
Once you reach age 65, you’re eligible for Medicare and you may have a limited amount of time to enroll to avoid costly penalties. If your employer has fewer than 20 employees, you generally must enroll in Medicare Parts A and B as your primary insurance — and pay premiums on Part B coverage. However, if your employer has 20 or more employees, you can delay Medicare until you leave your job or lose your employer coverage. Most people in this situation enroll immediately in Part A, which typically is free and can help reduce certain health expenses.
Unless your employer’s plan is fully subsidized, crunch the numbers. Calculating expenses can help you determine whether you’re better off paying for group coverage or switching to Medicare as your primary insurance.