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How To Create A Phased Retirement Policy

12 minute read

Right now, the Baby Boomer generation is reaching retirement age en masse with an estimated 10,000 people celebrating their 65th birthdays every day. And, while retirement has changed quite a bit over the years, this means that some industries are being rocked by a wave of retirees who may exit organizations quickly.

Why is this a problem?

Well, when a late-career employee makes an exit from an organization with no warning, the organization can suffer from knowledge loss, forcing them to fill a position without retaining valuable know-how that allows the job to be fulfilled to its max.

How To Create A Phased Retirement Policy

This loss of knowledge transfer is one of the biggest issues for HR when it comes to retirement planning for their staff members. So what can be done about it?

For many, it’s starting a phased retirement plan that has knowledge transfer built in. But these plans can be confusing, hard to implement, and even harder to get a buy-in for.

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If these issues sound like something your organization is struggling with currently or one that you think may be on the horizon, we have you covered. In this brief guide, we will go over what a phased retirement plan looks like and what it takes to make a great policy that benefits both you - the organization - and the retiree who is stepping down.

Let’s get started.

What Is Phased Retirement?

In a nutshell, a phased retirement program is a way for retirees to step down gradually from their roles over the course of a few months to a few years. The retiree will use this time to easily transition out of full-time work and into retired life or to line up their next role - it really depends on what the retiree wants to do.

During that transitional time, organizations can bring on the worker who will be taking over the role and have the retiree work with them to ensure that their valuable knowledge is transferred to their replacement. This allows the company to keep marching forward while also helping the retiree make a very tricky transition.

It’s important to note before we go any further, though, that phased retirement plans are unique to each company that uses them. You can learn a great deal from looking at how other companies have done them in the past but you have to make sure that your plan will work for your specific company if you want them to succeed.

How To Create A Phased Retirement Policy

So, what does it take to make a phased retirement policy? What do you need to consider when doing so?

Things to Consider Before Making Your Phased Retirement Policy

When you go to craft your policy, you want to make sure that you set requirements that will allow the group of individuals you are okay with retiring to retire easily and on their own terms.

That last bit is extra important.

You cannot target people or force people into retirement. Instead, you must open enrollment up to the group you think it will best serve and let the individual make the choice.

We’ll get into what requirements you should use in a little bit. For now, it’s important that you look over your workforce and see how the demographics break down to get a handle on what requirements you might want. As always, make sure to work closely with your legal team to make sure you are following all local, state, and federal laws when crafting any agreement like this.

The next thing you need to consider is how to make the plan mutually beneficial to both your organization and the retiree.

For this, you need to add into your agreement that the person taking up the phased retirement plan has to work with their replacement to make sure the transition goes smoothly. For the retiree, you should offer them a certain amount of hours per week that allows them to continue getting their benefits but also has a reduced workload and pay structure.

For example, if you have a person working 40 hours per week and then they take your offer, they can now work 20 hours per week and retain their benefits. During their work week, they will work closely with their replacement to make sure they are adequately trained to do the job.

How To Create A Phased Retirement Policy

Now that those concerns are addressed, let’s get into what a phased retirement policy might look like.

Setting Up a Phased Retirement Policy At Your Company: Step One

The first step of any phased retirement policy is to look at the demographics of your workforce. Most HR professionals say that the best workplaces for a phased retirement program to succeed are ones with older workers who have long tenures in their position.

Some industries fall into this sweet spot more than others.

For example, manufacturing and production most likely has more late-stage workers who have tons of experience compared to the tech industry, which is mainly filled with younger workers who have less time spent on the job.

So, pretty much any industry that has an older workforce with individuals who work long term in their roles. Higher education, manufacturing, and utilities, to name a few.

Why is this important?

Well, we’re not saying that phased retirement plans cannot work outside of these industries. However, they are typically ones where workers learn more and more the longer they are in a role and that knowledge needs to be transferred to their successor in order for the company to continue running as smooth as possible.

Step Two: Set Your Requirements

The second step, after you have looked over your demographics to make sure you have individuals that might take up the offer is to set your requirements.

How To Create A Phased Retirement Policy

We recommend making these as simple and easy to understand as possible. There’s no need to make things overly complicated.

Again, this will largely depend on your organization, but a good example is to offer the program to individuals who have worked at your company for a certain amount of time and have reached a certain age.

You could say that workers who are 60 years old and have 10 years of tenure at your organization can apply. You could also say that they have to be 55 with 10 years experience or really any requirement of this type that fits your needs.

These requirements should be rolling, too, and always open. So, for example, if someone has worked for you for 10 years and hits age 60, they would now meet the requirement. If they are 62 and just hit the 10 year mark, they now meet the requirement.

You can also do what the government and other organizations do where a person can work 25 or 30 years at your company and take phased retirement at any age. This works because the time worked is much longer than the other requirement scheme.

How To Create A Phased Retirement Policy

Remember, also, that there are industries that have workers that move around during their careers. So, for example, someone can work in a field for 30 years but only be with you for 5. You should have a way of dealing with these late-career employees, too. Just because they have only worked for you for a shorter period of time, they still have all of the knowledge that you want to retain. It’s best to be flexible here and work with people on a case by case basis if needed.

Step Three: Figure Out a Pay Structure

Once you have your requirements nailed down, you can start to look at ways to structure your payments.

The best advice here is to keep it super simple.

One of the biggest problems with phased retirement programs is that they can impact your retirees’ benefits packages. You need to address this because a late-career worker will tend to not take a plan that removes their healthcare plan or other things. They will simply wait until 65 or whenever they plan on retiring and take the traditional route, which doesn’t help your organization at all.

So, aim to set their hours to a rate that allows them to keep their benefits while also reducing their work.

Let’s use another example.

You have an employee who makes $200K per year and meets all of the requirements for the program (60 years old, 10 years experience). You can reduce his work hours to 20 hours per week, effectively reducing his pay by half (to $100K).

Chances are, this individual has a high paycheck because he has worked in the industry so long. Those raises add up over the course of a career.

How To Create A Phased Retirement Policy

This means that a new employee will cost less money. So, if you reduce the retiree’s pay to $100K and the going rate for that job is actually $100K, you can hire a new person to do the role and work with the retiree who will train them to fully fulfill the position.

This is where it’s beneficial to you. With this plan, you now have two people working in that role for the price of one. You are having the late-career worker’s knowledge transferred to the new hire and you are also paying the retiree and retaining their benefits, allowing them to make their transition.

With this plan, everyone wins. And that is exactly what you want to go for.

When you calculate your pay structure, like we said above, just keep it simple. Have the plan use basic math to make sure that everyone involved knows what’s going on.

Your late-career employee will understand that this is a business decision for you, too. So being transparent about all of it will make it easier.

Here’s a break down of our policy thus far:

Requirements: Age 60 and older with 10 years experience (experience from other companies may carry over on a case-by-case basis)

Pay: Base pay on hourly rates and cut by a half, lowering the amount of hours the employee works and therefore how much they are paid. Use these savings to hire their replacement and get them working together.

Benefits: Make sure to continue to offer healthcare and other benefits to those who take your program. Otherwise, it may not be an enticing enough offer.

Okay, now that we’ve had a brief recap, let’s move to timeframe.

Step Three: Create a Timeline That Works

The last thing we really need to address when it comes to your phased retirement policy is how long the program lasts.

These dates should be figured out when you meet with the retiree. Do not let the retiree use the program forever because the transition may never fully happen.

We recommend that you sit down and see what the retiree needs to figure out before they make their transition and also what skills you need them to teach their replacement. This will largely depend on your organization, the role that’s involved, and who the retiree is.

How To Create A Phased Retirement Policy

Because of this, we cannot give you an accurate example. However, phased retirement shouldn’t last for years on end. You want to do what’s right for both you and your employees so set a date that you can manage and make sure you stick to it. This should all be explained and agreed upon when you meet with retiree to set everything up.

How to Announce a Voluntary Retirement Policy

Once you have all of the above figured out, you will need to work closely with upper management and your legal team to create a document that will serve as the actual policy. This document should go over everything we previously covered and whatever legal clauses need added.

You should post this policy openly on your company’s intranet or somewhere else where your workers can easily find and read it over. You should also have open enrollment for the program so that as people meet the requirement they can take it up.

When you first launch your program, you should send an email out to all staff members to maximize transparency. You can also include a form with paychecks, send letters, or have managers explain the new program to employees.

Really, the goal here is to make sure your staff members knows what’s going on and that they can find where to get more information easily. At the end of the day, you want people to take this offer instead of having them walk away without transferring all of their knowledge to their successor.

How To Create A Phased Retirement Policy

To that end, make the whole process as easy as possible.

The Final Tip: Keep It Simple

As you can see, there are a lot of considerations you will need to make when you write up your phased retirement policy. You can make it as confusing as you want it to be, but why would you?

We recommend making everything ultra simple to understand. The hourly rates should be easily calculable, the stepping down process should be clear, benefits should be retained and easy to manage, and every other step of the process should be logical and easy to understand for everyone involved.

By keeping it simple, you can focus more on the important stuff like knowledge transfer and your employee’s transition out of the workforce.

How to Create a Phased Retirement Policy: The Final Say

Let’s have a brief recap of what we’ve discussed today.

What Is Phased Retirement?

Phased retirement is a form of retirement where a worker gradually steps down from a role over the course of a certain time period. The retiree will have reduced work hours during this time and will train their successor to make sure your company can continue to thrive after they have made their exit.

Who Benefits From Phased Retirement?

If the policy is crafted well, both the company and the retiree should benefit from this policy. Be transparent and explain that this benefits the business by helping to retain knowledge across generations.

Who Is Eligible for Phased Retirement?

This largely depends on your organization.

We used the example that an eligible employee might be 60 years or older with 10 years of experience. You will have to look at your demographics to see what range will work best. Also, consider being flexible as sometimes people have tons of experience elsewhere that you might want to count when looking at when they will retire.

How Does Pay Work During Phased Retirement?

Pay should be calculated as easily as possible. If your policy says that workers going through phased retirement will work half their normal hours, their pay should be reduced to reflect that change. You should use these savings to hire the new employee who will take over the role when the retiree steps down fully.

How Do You Calculate the ROI of a Phased Retirement Program?

This will be a question that upper management wants to know, and for good reason. After all, why would you want to do something like this, which involves work from many different departments and also the coordination of HR if there is no return?

The good news is that if you keep everything simple, your ROI is also simple to calculate.

How To Create A Phased Retirement Policy

We recommend looking at how much of a pay reduction your staffer will receive and then how much it will cost to hire a new person for the role. If your employee is paid $150K per year and their work time is reduced by half, they now make $75K per year.

A new person may only cost 80K per year to start, meaning that your total cost is now $155K. For that price, you now have two people working the role and you will eventually reduce costs by around half when the retiree steps down fully. You will also transfer all of that valuable knowledge too.

So the ROI is pretty self explanatory if you keep everything very simple.

How Should Benefits Work During a Phased Retirement?

Most late-career workers want to keep their benefits until they retire fully (and afterwards sometimes). This means that you should find ways to keep them when you offer a phased retirement plan. If you don’t, you may not have anyone take up the program, which is exactly what you want to avoid.

How Should You Announce a Phased Retirement Program?

Announcing the program tends to rely on how you announce other things at your organization. Whether that is via email, a notice board, within a paycheck envelope, etc. It really depends on where your employees know to look for an announcement.

We also recommend that you let everyone read over the policy via the company intranet or some other place. Be as open as possible.

Conclusion

If you want to have a phased retirement program that works for your organization, you need to take some of the best practices from other organizations that have used the policy in the past.

Then you need to make sure that the policy you come up with works for your specific needs. You also need to make sure that your policy is compliant with all local, state, and federal laws along with the guidelines set forth by the EEOC, which are in place to protect older workers.

If you work closely with your legal team and your upper management teams, you can craft a policy that works for both you and your retirees.

Want to learn more about phased retirement plans? Check out our guide here:

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