`Phased retirement' allows people to ease out of work

PERSONAL FINANCE

Dollars & Sense

July 23, 2000|By Eileen Ambrose

During 43 years of teaching, philosophy Professor Jerome Schneewind developed a lot of outside interests. Travel. Playing the cello. Fund-raising for the American Civil Liberties Union. Two grandchildren.

Wanting to spend more time on these, the Johns Hopkins University professor approached the dean a year and a half ago about a "phased retirement." Now, Schneewind teaches half-time, or one course per semester. He earns half his full-time salary and draws upon his retirement plan to supplement his pay.

"It's working out fine. I'm still doing a lot of work in philosophy," said the 70-year-old Baltimore resident. "I do have more time to do some of these other things, or to do nothing."

If you haven't heard before about phased retirement - reducing work hours and responsibilities leading up to a full-fledge retirement - you likely will in the near future.

According to a survey last year by benefits consulting firm Watson Wyatt Worldwide, 16 percent of 586 large companies offered phased retirement and another 28 percent were interested in starting a program in the next few years.

With a shortage of skilled workers, a strong economy and a smaller generation coming on the heels of baby boomers, employers are eager to keep experienced employees from walking out the door and into retirement.

For workers who are now living longer, phased retirement is a way to remain active, free up time for leisure or caring for elderly parents and to boost retirement income, said Valerie Paganelli, a Watson Wyatt senior retirement consultant.

Because of the heightened interest in phased retirement, legislation was recently introduced in Congress to revise the tax code and make it easier for employers to design such programs. The legislation would allow companies to voluntarily give workers who reach age 59.5 or 30 years of service a portion of their pension benefits along with pay for part-time work.

Currently, workers who haven't reached retirement age under their traditional pension can't tap into the funds unless they leave the company, said James Delaplane, a vice president with the Association of Private Pensions and Welfare Plans in Washington. That's forced some workers to leave one company to get their pension and then work part-time at another, possibly a former competitor, Delaplane said.

"Employers think, `That doesn't make any sense. We want them to stay,'" he said.

As more companies offer phased retirement, more workers will be deciding if they can afford it. Drawing upon pensions or retirement savings too early means there will be less money later.

That's a concern for some advocates for women, who generally outlive men and may find the survivor's benefits of a husband's pension are smaller because of early withdrawals, said Ron Gebhardtsbauer, a senior pension fellow at the American Academy of Actuaries in Washington.

Before jumping into a phased retirement, figure out when you want to fully retire and how much you'll need to do so comfortably, advised David Root, Jr., chief executive officer of the financial planning firm of D. C. Root & Co. in Pittsburgh. It's only then that you'll be able to figure out if cutting back on work, earning less and possibly contributing less to a workplace savings plan will derail full retirement plans or not, he said.

Workers must also determine how a phased retirement would affect their pension, said Deborah Russell, a senior coordinator with the American Association of Retired Persons in Washington.

Because many companies calculate pensions based on your last three to five years of earnings, reducing your hours during those years will diminish your pension, she said. However, if the employer figures your pension based on your highest income years, then you won't be penalized for phasing into retirement, she said.

Experts say there are lots of other questions employees must ask: Can they can continue contributing to a 401(k) or accruing pension benefits when working part-time? Will cutting back hours eliminate health or other employer benefits?

Will phased retirement affect Social Security benefits? Workers between 65 and 69 no longer lose part of their benefits if they earn above a certain income. That's not the case for those 62 to 64, who forfeit $1 of benefits for every $2 earned above the $10,080 annual limit. Responsibilities may change in phased retirement, so employees should know whether they will continue doing the same kind of work or not, Russell said.

Employees also should find out if there are limits on how long the phased retirement will last or if they can revert to full-time status if they don't like their new situation, Russell said. If there is no reversing course, workers need to ask themselves if they are ready for that, she said.

Employers encouraging phased retirement may want to provide financial planning to workers considering it, Paganelli said. Another incentive could be long-term care insurance for workers phasing into retirement and their parents, she said.

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