More older employees choose to reduce their work hours and phase into retirement. Even though they’ll take a cut in pay, a phased retirement has financial benefits.
Here are three of them:
Preserves retirement savings. Even if you earn much less than you earned from full-time work, the extra money can help minimize the amount you withdraw from your retirement savings for a few years, leaving more money to grow in your tax-advantaged accounts.
Continuing to contribute to your retirement savings can give you a leg up, too. You may still qualify to contribute to your employer’s 401(k) and receive an employer match. And you can contribute to a Roth IRA provided you have earned income from a job. In 2024, people 50 and older can contribute up to $8,000 (or the amount you earned from working, if less).
Also, if you earned too much to contribute to a Roth in the past, you may qualify after you partially retire.
Increases lifetime income by delaying Social Security. The extra income you earn from working part-time can help you afford to postpone claiming Social Security benefits and could boost your monthly payout when you finally sign up.
Full retirement age is 66 for people born from 1943 to 1954 and gradually increases, by two months for each birth year, until it reaches age 67 for people born in 1960 and later. Claiming benefits at age 62 rather than your full retirement age can reduce your annual benefits by as much as 30 percent, depending on the year you were born.
Another good reason to wait until at least full retirement age to apply for benefits: You can earn any amount of money without triggering the earnings test, which temporarily reduces benefits for those who have earnings above a specific threshold.
If you wait past your full retirement age to claim benefits, your payouts get a boost. For each year you delay between full retirement age and age 70, your annual benefits will increase by 8 percent. “Not only is there a lot more of a benefit, but the annual cost-of-living adjustment is based on a higher base amount of benefit, so the growth of future benefits has a compounding effect,” says Mitchell Freedman, a CPA and personal financial specialist in Westlake Village, California.
Get health insurance before age 65—at a reasonable price. If your employer lets part-time workers continue to receive health insurance benefits, taking advantage of that can make a big difference in your finances if you stop full-time work before you’re eligible for Medicare. You may have to pay a higher premium than you did when working full-time, but it’s often a better deal than getting your own coverage in your sixties.
