Phased Retirement: A Quick Guide (And a Cheat Sheet)

When it comes to retirement, the conversation is usually about money. Did the person save enough? Did they start saving early enough? How much do they intend to spend on a weekly, monthly, yearly basis? What’s strange is that we very rarely talk about how the switch to retirement will impact the retiree – and the business they are leaving – when they suddenly make the switch, which is where phased retirement comes in.

Just like the name sounds, phased retirement is a gradual step down from full-time work to part-time work to full retirement, spreading out the change over time to make it easier for both parties – the retiree and the organization – to transition.

So, in this guide, we will explore some phased retirement best practices while also looking at the benefits of implementing a phased retirement solution alongside some of the possible downsides.

Let’s get started.

First, What Is Phased Retirement?

Like we mentioned above, phased retirement is a process used to help employees gradually exit the workforce while also allowing the company they are leaving the time they need to find a suitable replacement.

“Phased Retirement is a human resources tool that allows full-time employees to work part-time schedules while beginning to draw retirement benefits,” writes the US Office of Personnel Management (OPM).

“This new tool will allow managers to better provide unique mentoring opportunities for employees while increasing access to the decades of institutional knowledge and experience that retirees can provide.”

This gradual step down happens in – as the name suggests – phases. Phased retirement plans can differ from organization to organization or person to person. However, there are laws that mandate how older workers are treated and we highly suggest you read up on them or consult your legal team before implementing a policy of your own.

That doesn’t mean you can’t be creative with you phased retirement policy – you just have to make sure you follow the rules and aren’t discriminating.

Okay, now that we have a baseline understanding of what phased retirement is, let’s get into the major benefits of the program.

The Benefits of Phased Retirement

Today’s workforce is in a state of flux because there are more generations working right now than ever before. We have Gen Z making their workforce entrance, Millennials settling in, Gen X entering upper management, and Baby Boomers making their exit.

This presents a few problems, namely that Baby Boomers are hitting retirement age en masse. There’s a commonly stated stat that proclaims that about 10,000 Baby Boomers hit retirement age every day in the US. That means that they are now eligible for retirement.

Despite the fact that retirement is changing – Boomers are working far longer than other generations who reach retirement age – the fact remains that Boomers are starting to make a big exit from the workforce, taking a lot of their skills, knowledge, and proven leadership skills with them.

So, in order to curb the negative effects of the this sudden exit, human resources needs to find a way to transfer all of those skills to Gen Xers and Millennials who will be filling in the role. Phased retirement can seriously help with this because it allows the retiree to slowly reduce their workload while teaching those who will remain.

Knowledge transfer can keep a business rolling through all of these transitions. It also helps deal with a side of retirement that we typically ignore.

Understanding the Hidden Side of Retirement

Like we said up top, retirement conversations are dominated by financial discussions. When we first enter the workforce, we’re told over and over that we need to start saving for our eventual retirement.

While this is good advice – you obviously do need to have a nest egg ready for when you make the switch – we tend to ignore the social, emotional, and personal side of retirement. What are we supposed to do with all of our newfound free time? Will I still see all of my friends?

These questions are common yet there are rarely plans in place to help employees through their retirement lifestyle planning. This makes them not want to retire, which can become problematic for employers and is obviously a huge bummer for retirees who have worked their entire lives for a chance to retire.

So, with a phased retirement program, retirees can slowly make the switch instead of abruptly changing their entire lives. This also helps employers reduce the risk of ‘brain drain’ that can happen when multiple people decide to retire at one time.

With that in mind, what are the benefits of having a knowledge transfer plan?

Future Proofing Your Workforce

When retirees leave, they can take time-honed expertise with them, leaving younger workers struggling to fulfill the role.

“Knowing who knows what, who needs to know what, and how to transfer that knowledge is critical — especially when so much of a company’s worth consists of information,” says Chris Cancialosi in an article for Forbes.

“Investing in developing an effective way to transfer knowledge may, in the least, save you some headaches and, at the most, save your business.”

Cancialosi says that knowledge transfer starts when a person is hired. You need to make sure that you have a plan to train that person and infuse them with the knowledge of their leaders so that when it comes time to take over, they can do so without any headaches.

Phased retirement plans offer this training, though if you want to do it well, a knowledge transfer plan needs to be put on paper long before a retiree starts the exit process.

By knowing what knowledge you need to retain and how you will retain it, you will be able to help the retiree understand and prepare for the hidden side of retirement while knowing that you already have a plan for your business to continue without them.

Also, according to numerous HR leaders, workforce planning is a huge competitive advantage for organizations to employ. However, most HR teams neglect workforce planning because it never seems like the right time to make a plan.

If your organization is looking at how employees will retire long before they will actually make the switch, you can plan your workforce more successfully.

Understanding the benefits of phased retirement is one thing, we also need to examine the downsides, which mainly revolve around how benefits work for older employees after they make the full switch into retired life.

Problems You Will Have to Solve With Phased Retirement

While phased retirement offers a slew of positives for your business, there are quite a few downsides that your plan will have to address if you want it to be successful. Many of these downsides occur because of how employees are paid when they retire.

The first issue is how pension plans typically operate.

Most pension plans require workers to work a certain amount of time or get paid a certain amount of salary during the years up to their exit. With a phased plan, those hours would ramp down towards the end of someone’s career, possibly impacting how much they will make from their pension plan.

“Before signing on, those enrolled in a defined benefit plan — especially workers in public sector jobs where defined benefit plans are the norm — should investigate how a reduced salary for the last few years of employment will affect their pension calculation,” reports Christina Couch from Bankrate.

“If reducing working hours will also lower your pension earnings, an alternative option is to quit your current job, begin taking your full pension earnings, then return to the company as a part-time employee or independent contractor.”

The same problem can happen with healthcare benefits, profit sharing incentives, and social security benefits.

Basically, the issue here is that a lot of standard benefits that were put in place to allow people to retire in the past have not evolved alongside other retirement options. Most of these benefits depend on a worker working a dedicated number of hours or making a certain wage in the years up to their retirement.

Here’s Christina Couch from Bankrate again, talking about social security benefits:

“Workers under full retirement age who sacrifice a high-paying job to enter a phased retirement plan — especially a lengthy one that would reduce earnings for several years — could wind up with a lower Social Security check than their full-time peers. For example, a worker who’s maintained a salary at or greater than $60,000 for the past 30 years would be significantly hurt by a five-year phased retirement plan that reduced his salary to $30,000.”

So, how have these issues been handled by organizations? Well, to be honest, no one has really figured it out.

Phased Retirement Hasn’t Caught On

A few years ago, the buzz around phased retirement was strong. Everyone seemed to be talking about it because – like we mentioned above – there’s a lot of great workforce planning benefits for the employer and a gradual change for the employee. It seems like a win-win, but given that many of the benefits that currently exist are impacted by modern phased retirement programs, many people have opted to not go the phased route.

In one telling example, back in 2012, Congress passed a law that allows federal employees to use phased retirement. From 2012 to 2016, the Office of Personnel Management kept track of how many employees used the program.

Only 31 people signed up.

“To learn that there are only 31 employees participating in phased retirement both shocks and disappoints me,” Richard Thissen, national president of the National Active and Retired Federal Employees Association, told Kellie Lunney at Government Executive.

“This money saving management tool is a win-win-win: A win for the agencies in terms of continuity in operations; a win for the employee who can test the retirement waters; and a win for the American taxpayers, as this flexibility saves the government money.”

Despite all of those wins, 31 people is a ridiculously low figure. So, what happened?

Well, lots of things. Apparently, when it came to roll out of the program, some employees weren’t aware of their options, were involved in collective bargaining efforts that barred them from participating, and some just merely weren’t offered the program.

“That’s because many agencies either haven’t finalized phased retirement plans yet that meet the needs of their missions as well as collective bargaining agreements, or aren’t offering the benefit to eligible employees,” Lunney explains for Government Executive.

“It’s also possible some federal employees don’t know what their options are, or just aren’t interested/eligible.”

It’s worth noting, though, that this report was from 2016, examining how well the roll out of phased retirement went over the course of four years.

Okay, so now that we’ve explored some of the issues with phased retirement, what can we do to use the program without all of these downsides?

Phased Retirement: Customize Your Plan

Most of the problems with phased retirement can be attributed to a shortlist of things:

• Poor roll out
• Pre-existing benefit conflict
• Inflexibility

Basically, if the employee isn’t aware that phased retirement is an option, how would they ever know when to sign up? If they have benefits that would be impacted by the choice to gradually step down, why not keep paying them the same amount or offer a more flexible work structure instead of reduced hours? Why are all of these programs so one-size-fits-all?

Let’s start with the first issue: rolling out the program.

Creating a Phased Retirement Program That Works

Since there are so many positives to having a phased retirement program, from allowing your employee to easily transition out of the company to ensuring that their knowledge and skills will transfer over, it stands to reason that if you want to create a phased program, you will have to make sure employees are fully aware of how the system works.

Creating a program largely depends on your company’s culture, your local and federal laws (please seek legal counsel before implementing anything that impacts older workers to make sure you are in compliance with regulations), and who the employee is as a person.

When someone reaches a certain age – typically an age before retirement age, such as 55 – HR should explain the retirement options to the individual and keep that conversation going until they reach proper retirement age.

Not only does this allow you – the manager – to open up retirement discussion early, it also allows the person to start considering what may hold them back from making the switch. After all, retirement should be a nice, rewarding transition – not one that is filled with stress.

So, the first step is make a plan that fits your company, and the second step is to make sure you tell your employees how the program works, making sure they fully understand their options.

Flexibility and Phased Retirement Is a Must

Based on the government study, it’s pretty clear that phased retirement programs need to be flexible in order to deal with all of the hiccups can come along with pre-existing benefits.

This means that HR managers and company policy makers need to understand what existing benefits their staffers have and a implementing a phased program will impact them.

If you’re employees will be taking social security – which many will be – you need to make sure your phased retirement policy doesn’t undo all of their work. The easiest way to pull this off is to allow your employees to make the same amount even when they are working less on the time sheet. Or, you could allow phased retirement to happen by opening up flexibility in how they perform the job.

For example, you could offer your employees more opportunities to work from home or the ability to make their own hours. You could also switch them to a consulting role that pays them the same amount but allows them to work a reduced amount of hours – sort of like a retainer.

These choices all heavily depend on your company and the laws that affect you. However, you should make a program that allows as much flexibility as possible if you want a phased program to work.

Here’s what AARP has to say:

“In addition to expanding work opportunities for workers 50+, a successful phased retirement program will need to be consistent with current law and provide employees with comprehensive information and education about how the program works and how participation in their employer-sponsored health, pension, and welfare benefits might be affected.”

They sum it up succinctly: you need a plan to works both legally and is flexible enough to ensure that your staff to utilize the program without jeopardizing all of the other benefits they have accrued.

Now, let’s wrap all of this up.

Phased Retirement: A Brief Summary

We covered a lot of ground in this article. Here’s some of the key FAQ:

What Is Phased Retirement?

Phased retirement is a form of retirement planning that allows an employee to retire gradually, stepping down little by little until they finally make the full exit from the organization.

Why Is Phased Retirement Important?

For a few reasons. One, it allows the employee slowly go from a full time schedule to a fully retired scheduling, making the transition easier to manage on an emotional and social level. This stress reduction can allow the employee to consider how their newfound free time will be spent, creating a better chance that they will retire successfully.

The second is that it allows the company to ensure that the exiting worker will be able to transfer all of their knowledge to a replacement while also letting that replacement get ready to fully take over. Knowledge transfer is a big deal when a person has worked at an organization for years upon years, making sure you fill in those potential knowledge gaps is vital.

Lastly, a phased retirement plan can allow HR managers to plan their workforce, aligning their talent with their business needs. Workforce planning is one of the most wanted – yet most ignored – aspects of HR. So if you can pull out a proper workforce plan, you’ll have a competitive advantage.

Are There Any Downsides to Phased Retirement Programs?

Yes! According to multiple sources, phased retirement can often impact the benefits packages that employees have already earned. For example, if they have healthcare benefits or they plan on taking out social security, a reduction in hours worked or a reduction in pay could impact how much they will make once they retire.

Also, it’s important that phased retirement plans are explained fully to make sure that employees will fully understand what is being extended to them. Legal issues are also a huge hurdle. We can’t get into specifics because they change so much across states (and we’re not lawyers!) but you need to seriously research and talk to your legal team before changing how retirement works for any of your staff.

How Do You Create a Great Phased Retirement Plan?

We recommend you be as flexible as possible. Look to see how phased plans will impact your staff – specifically, what benefits may conflict with the plan – and what works best for each individual. Chances are, your phased retirement plan will need to be a bit different from person to person. This also means that you may want to look into ways for the person to be a consultant, to work from home or other ways that offer up a flexible work arrangement without reducing pay and, therefore, impacting benefits.

Phased Retirement: The Takeaways

The final say about phased retirement is that it’s a great option for companies that can make it work. By implementing the plan, you can ensure knowledge transfer while also helping your staff gradually step into retirement, increasing their chances of doing so successfully without all of the social and emotional stress that can come with a quick and abrupt switch.

There are many laws, regulations, and other compliance issues that need addressed before implementing a plan and plans need to be flexible enough to ensure that they do not impact other benefits.

With all of that, phased retirement can be great if a company wants to go through the motions of creating one. As more and more nuanced retirement plans come to light over the years, a lot of old school policies will have to change with them. However, only the future can tell what those changes will be.

Josh Hrala

Josh is an HR journalist and ghostwriter who's been covering outplacement and offboarding for over six years. Before pivoting to the HR world, he was a science journalist whose work can be found in Popular Science, ScienceAlert, The Huffington Post, Cracked, Modern Notion, and more.