5 factors about phased retirement packages
The most recent stock market rout has many Americans postponing retirement while others are wondering if they’ll have to work forever. In between are those who would like to work part time for their current employers for a couple of years before taking the final plunge into retirement.
Some companies are accommodating valued employees with so-called phased retirement opportunities. While currently only 5 percent of midsize and large companies offer a formal phased retirement program, nearly 60 percent expect to develop one in the next five years, according to a 2008 survey by Hewitt Associates.
But is this a good idea for workers?
- Pension problems.
- Health care restrictions.
- Profit-sharing incentives.
- Social Security issues.
- Spousal and death benefits.
When Arnim Meyburg, Ph.D., a civil and environmental engineering professor at Cornell University in Ithaca, N.Y., hit 67, he was ready to start winding down his career. “I have so many hobbies and unfinished business; I wanted to use my healthy years to accomplish that,” Meyburg says. “But I didn’t want to go from 100 miles per hour to zero in one shot.”
Meyburg’s solution? Ease into retirement slowly. Enrolling in Cornell’s phased retirement program — a one- to three-year plan that allows faculty to teach part time while still retaining their full health care and retirement benefits — Meyburg gradually transitioned into retirement over the course of two years, giving him time to adjust to the lifestyle change.
“It was absolutely perfect,” Meyburg says. “I traveled more; I was much more relaxed. Not having this additional teaching allowed me to look after other interests more than I could ever do before.”
Varying tremendously from plan to plan, phased retirement programs offer would-be retirees the opportunity to gradually adapt to full retirement. However, they also come with growing concerns over how scheduling flexibility will affect retirement benefits, such as Social Security, health care and pension plans. Before signing on the dotted line, consider these five potential problems with phased retirement packages.
While phased retirement made no impact on Meyburg’s pension plan, Keith Brainard, research director for the National Association of State Retirement Administrators, says that not everyone is so lucky.
“Under many arrangements the pension benefit is determined by the combination of salary and years of service,” Brainard says. In fact, many pension formulas place a higher weighting on earnings during the final years of employment — which ultimately benefit full-time workers.
“If you’re working half time and making half pay in your work, that could reduce your final average salary calculation and reduce your long-term pension benefit,” Brainard says.
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. Union workers who draw retirement benefits through both their union and current employer should also ask about how going part time could affect both plans, says William Blyth, president of Blyth and Associates, a financial services firm in Chicago.
“Under most union plans, you have to work a minimum of 1,600 or 2,000 hours a year, and if you work less than that, you may not get credit for that year,” Blyth says. “Union workers that spend most of their time with one employer may also have a plan with that company. If that were the case, their second plan could be affected, too.”
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.
Health care restrictions
Reducing your hours could also render you ineligible for company-sponsored health care. While that may not matter to workers 65 and over who are switching over to Medicare anyway, workers who don’t yet qualify or who plan to rely on company-sponsored insurance to supplement their Medicare package could find themselves losing much of their reduced salary to increased health care costs.
“That’s a real problem,” says Blyth. “A lot of people retire or move toward retirement, find out their health insurance is actually more than their pension and have to try to unretire.”
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.
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?'”