The pros and cons of phased retirement
For many Canadians, the prospect of retirement brings a mix of excitement and anxiety.
While the thought of stepping away from the workforce is appealing, financial uncertainty can cause hesitation, especially for those who may not feel fully prepared to stop working entirely.
In such cases, phased retirement offers a potential solution, allowing individuals to gradually reduce their working hours while maintaining some level of income. This strategy not only offers financial relief but also provides a smoother transition into retirement.
What is phased retirement?
Phased retirement allows individuals to continue working in a reduced capacity while they ease into full retirement. Rather than stopping work abruptly, employees can negotiate a part-time schedule with their employer, working fewer hours or days per week. This enables them to continue earning income, remain connected to their profession, and access benefits while starting to enjoy more personal time.
For employers, this option allows them to retain the knowledge of seasoned employees and do a more gradual transition and training for those coming up behind them to fill their void.
In certain situations, this arrangement is formalized through existing workplace policies, while for others, it requires negotiation between the employee and employer. This flexible approach provides an option for Canadians who may feel financially underprepared to retire fully but want to start enjoying some aspects of retirement life.
The pros of phased retirement
Phased retirement offers several advantages, particularly for those concerned about their financial situation or overall readiness for retirement:
1. Continued income: By remaining in the workforce part-time, individuals can continue to receive a steady income, which can supplement savings, cover living expenses, or allow additional time to grow retirement savings. This is especially helpful for those who feel their retirement nest egg is insufficient.
2. Extended workplace benefits: In some cases, phased retirees may continue to receive workplace benefits, such as health insurance, pension contributions, or employer-sponsored savings plans. This can be a crucial safety net for those who need to bridge the gap between employment and full retirement.
3. Reduced pressure on savings: Phased retirement allows individuals to delay tapping into their retirement savings, such as RRSPs or TFSAs, for a longer period. This can give investments more time to grow, ultimately providing a larger pool of funds when full retirement arrives.
4. More time to plan: The gradual transition gives individuals time to adjust their lifestyle, spending habits, and future financial plans. It also provides additional breathing room to reevaluate retirement goals or make up for gaps in savings.
5. Positive impact on CPP withdrawals: Delaying full retirement and continuing to work part-time can positively impact Canada Pension Plan (CPP) benefits. By working longer, Canadians can postpone CPP withdrawals, resulting in higher monthly payments when they do start collecting. Additionally, continuing to contribute to CPP during the phased retirement period can further increase the final benefit amount, providing more financial security in the later stages of retirement.
The cons of phased retirement
While phased retirement offers several benefits, there are also some drawbacks to consider:
1. Employer willingness: Not all employers are open to offering phased retirement options. Some companies may not have the flexibility to accommodate a part-time schedule or may not offer benefits to part-time employees, making this option unavailable to everyone.
2. Income Reduction: Even though phased retirees continue to earn income, it is typically less than their full-time salary. For those with significant financial needs or debt obligations, the reduced income might not be sufficient to cover all expenses.
3. Prolonged work stress: While working fewer hours can be less stressful than full-time employment, some individuals may find it difficult to manage the demands of even part-time work as they age. For those experiencing burnout or health issues, phased retirement might not provide the relief they need.
4. Impact on retirement savings: In some cases, transitioning to part-time work may reduce contributions to employer-sponsored retirement savings plans or pensions. This could result in smaller future retirement payouts, making it essential to understand the potential impact on these retirement vehicles.
Who benefits most from phased retirement?
Phased retirement is ideal for Canadians who:
• Feel financially unprepared to retire fully but are nearing retirement age.
• Want to extend their working life without committing to full-time employment.
• Enjoy their work or find personal fulfillment in staying active in their profession.
• Are in good health and can manage the demands of part-time work.
• Would benefit from delaying CPP withdrawals to increase their monthly payments.
For individuals in these situations, phased retirement offers a viable and appealing option. It allows them to gradually transition into retirement, maintain a level of financial stability, and enjoy the benefits of continued employment without the pressure of full-time work.
However, it is essential to weigh the pros and cons carefully and consider whether this strategy aligns with personal goals, health, and financial needs.
For those who fit the profile, phased retirement can be a valuable step toward achieving a comfortable and fulfilling retirement.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.