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Don’t want to fully retire? Here’s when phased retirement may work

Old woman working at home.
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Retirement doesn't have to be a drastic cut from a full-time job to no job at all.

You may still want to work, just not as much — especially if you aren't financially ready to retire.

The gradual reduction of hours known as "phased retirement" could be the answer, and it can be achieved either through an official policy at your employer or in a more informal fashion.

In fact, 45% of U.S. workers envision reducing their work hours in a phased transition into retirement, according to the latest Transamerica Retirement Survey of Workers. The survey, released in May 2020, was conducted by The Harris Poll from Nov. 6 to Dec. 27, 2019 among a nationally representative sample of 5,277 workers.

Meanwhile, the number of employers offering phased retirement is slowly increasing, a survey by the Society for Human Resource Management found. Fully 15% of organizations offer some employees the option through an informal program, while 6% have a formal program. However, employers prefer to limit it to high-performers and those with in-demand skills, according to the Society.

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The idea of working past the typical retirement age has gained some steam as people live longer and employer pension plans have dwindled, said Steve Parrish, co-director of the Center for Retirement Income at The American College of Financial Services.

The Covid-19 pandemic has also resulted in more flexibility for employees.

"People are starting to say maybe it is a slow-down process and eventually full retirement," Parrish said.

If phased retirement is something you are considering, check your company's policy. Formal programs tend to be offered by large corporations, and come with administrative difficulties and compliance challenges, according to a study by benefits consulting firm Willis Towers Watson.

Generally, the company will set a certain number of work hours that need to be maintained in order to keep health insurance in place.

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If your employer doesn't have a formal program, you may still be able to work with them to scale back your hours.

"The key is having those conversations well before you are ready to walk out the door," said certified financial planner Diahann Lassus, managing principal at Peapack Private Wealth Management, based in New Providence, New Jersey.

Find out how many hours you'll need to work to keep your health benefits since it will cost you to purchase your own. Once you are over age 65, you'll qualify for Medicare. While most people don't pay for Part A, you will for Part B. The amount depends on your income.

If your current employer won't work with you, you can look for a new job or even start a business.

"You may retire from one job and start a different career for something that you have always wanted to do and couldn't afford to do in the past," said Lassus, a member of the CNBC Financial Advisor Council.

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Working part-time can also help you push off collecting Social Security. While many people start collecting reduced benefits at age 62, 100% of the benefits kick in at age 67, for those born in 1960 and later. If you push receiving Social Security back to age 70, the benefit jumps to 124%.

"If you have longevity in your family or there is the expectation you will live past that, then it can make sense to continue to work longer at some level to be able to get that delayed benefit," Lassus said.

However, you can't delay any required minimum distributions from your individual retirement plan, which start at age 72.

You can hold off taking an RMD from your current employer-sponsored retirement account, like a 401(k) or 403(b), if you have one, are still working and don't own more than 5% of the business you work for.

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