Phased retirement: Easing into it

Senior couple sitting on bench in the park
  • Financial advisers say it's best to delay drawing Social Security.
  • If you work while drawing Social Security, some benefits may be cut back.
  • Working while practicing living on less money can help ease you into it.

Older Americans increasingly are working well into their 60s or 70s to better prepare for retirement. Some take a phased retirement approach, working fewer hours or changing careers altogether.

Easing into retirement can take many other forms: buying a second home early, taking more frequent vacations while still working or living on a smaller budget -- a form of "practice retirement" -- to name just a few.

Retirement is one of the least-planned aspects of life for many people so easing into it financially is a good step, says Bo Hanson, CFP, a financial adviser with Preston & Cleveland Wealth Management in Georgia.

"In this country, retirement has sort of become this mythological thing where people think it's magically going to happen," Hanson says. "At 65, you're going to retire."

Hold off on Social Security

One of the best ways to ease into retirement is to live within your means and not rely on income from Social Security benefits until age 70, financial planners say. Starting at age 62, for each year that you postpone applying for benefits, you get 8 percent more per year in benefits, says Kenn Tacchino, a professor and director of the New York Life Center for Retirement Income at The American College in Bryn Mawr, Pa. It's the easiest raise you'll ever get in your life, he says.

Some people want to start collecting as soon as they're eligible at age 62, says Tacchino. But that's not the way to do it, especially since people can just about double their monthly income by waiting until they're 70.

"The question is, do you want the money at age 62 to buy a boat, or do you want a lot more money at 90?" he says.

If you go back to work

Most baby boomers reach full retirement age in their 66th year -- meaning they'll get their full Social Security benefits at that age. But for people who claim the benefits before then and subsequently find they have to return to the workforce, the benefits will be cut back by $1 for every $2 more than $14,160 earned in a year (as of 2011), says Dorothy Clark, a Social Security Administration, or SSA, spokeswoman. At the beginning of the year in which they reach full retirement age, the threshold goes up to $37,680, when $1 of every $3 is cut back by the SSA. (The threshold figures can change over time, in line with the cost of living.) Once they hit the month in which they reach full retirement age, retirees can earn any amount without it affecting their Social Security benefits.

Workers who begin collecting Social Security early but who want to stop taking the payments and restart later at a higher rate can only do that within a year, but they have to pay the money they'd already received back to the SSA, says Christine Fahlund, a senior financial planner at T. Rowe Price. This allows people to restart the clock with a bigger benefit at a later date.


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