5 factors about phased retirement packages

While many organizations allow would-be retirees to keep their same health care plan, those eyeing phased retirement packages should clarify upfront if the arrangement will impact their health care coverage, and if so, whether they're eligible under the Consolidated Omnibus Budget Reconciliation Act, or COBRA, if they lose that benefit.

The National Coalition on Health Care, a Washington D.C.-based health care research group, reports that the average out-of-pocket costs for a worker with company-sponsored insurance have more than doubled since 2000. Those who would lose their health insurance should carefully evaluate whether the benefits of slowly moving into retirement will outweigh the costs.

Profit-sharing incentives

While ancillary benefits, such as profit-sharing incentives, typically take a back seat when considering retirement issues, Sheldon Smith, president-elect of the American Society of Pension Professionals and Actuaries, says that it should be a top priority when deciding if a phased retirement package is right for you.

Part-time status may render an employee ineligible for profit-sharing contributions.

"In a profit-sharing plan, your share is typically based on your current year's compensation," says Smith. "In a phased retirement plan, your portion of the profit share is going to diminish accordingly and that could make a big difference."

Even if the profit-sharing plan specifies that a reduced salary during the last few years of employment won't affect your overall benefit, it could have stipulations that require employees to work a certain number of hours each year -- usually at least 1,000 -- to take part in the plan. Substantially paring down your hours could make you ineligible for this benefit.

Social Security issues

Depending on your age, a phased retirement plan could impact your Social Security benefits. "If the phased retirement period is part of the Social Security earnings calculation and if lower earnings are resulting from the phased retirement period, it's possible that Social Security benefits could be diminished also."

When it comes to Social Security, a phased retirement plan is a double-edged sword for workers who enter the plan under full retirement age (those who are over full retirement age won't be affected). According to the Social Security Administration Web site, your Social Security benefits are based on your average monthly earnings for your 35 highest-income years.

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.

A phased retirement program could be a fiscal blessing, at least temporarily, for workers who plan on drawing Social Security early. Under current statutes, employees who draw Social Security before their government-designated full retirement age (65, 66 or 67 depending on year of birth) can earn up to $14,160 per year without penalty. For every $1 earned over that mark, the Social Security Administration will withhold $0.50 in benefits, an amount that will be repaid in monthly installments after you retire for good. Workers who plan on drawing Social Security and who enter a phased retirement plan before their designated retirement age will earn less and therefore have less money withheld than those who maintain full-time jobs. While temporarily beneficial, workers in this scenario will still wind up with lower Social Security benefits after they reach full retirement age than those who went from full-time employment to retirement at full retirement age.

The good news is that some (but not all) phased retirement plans come with protections that prevent the program from impacting Social Security at all. Before signing on, ask your human resources expert or financial adviser to clarify exactly how much Social Security will be affected.

Spousal and death benefits

Retirement doesn't just affect the retiree -- it also impacts the retiree's dependents.

"A lot of companies offer a life insurance program that provides a death benefit (for a surviving spouse)," says Smith. "When you go into phased retirement, the amount of your life insurance might adjust, too."

Because plans differ wildly in how they affect retirees and their dependents, Smith advises those eyeing phased retirement to investigate whether their company's plan affects survivor benefits and compensation.

Before enrolling in a retirement program, phased or otherwise, workers should consider their full financial picture. "When somebody offers a program like a phased retirement package, people immediately jump at it without looking at how it will affect their future," says financial adviser Blyth. "The real question is 'How does this plan fit into my life?'"


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