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December 2010 | View Full Issue | Newsletter Archive

BLIPS ON THE FINANCIAL RADAR
Buzzwords, Trends, and Unintended Consequences
Here are a few financial particulars currently receiving a fair amount of attention in the financial press:

BUZZWORD: PHASED RETIREMENT

The combination of a struggling economy and declining asset values has affected a sea change on older American workers. Instead of anticipating an early retirement filled with leisure and travel, a new set of expectations have appeared. For some, the prospects for retirement have been postponed; for others, the only option appears to continue working as long as one is able.

But even these adjusted objectives face a daunting challenge: The realities of aging. Even if we are healthy and have employment, most of us face the prospect of declining capacity as we get older. As we age, we can't work as hard or as long as we could when we were age 30 or 40. This reality can put some people in a bind: In their current circumstances, they don't have enough time to "catch up" for retirement, and they don't have the physical capacity to earn more to make up the difference.

Enter the idea of "Phased Retirement." The term can refer to a broad range of scenarios, but all generally revolve around two ideas: (1) the individual continues working, but usually with a reduction in the number of hours on the job. (2) In concert with the decreased workload, the individual supplements his income with previously accumulated retirement assets.

Phased retirement could take many forms. In fact, many individuals that we might currently classify as "semi-retired" are actually implementing a phased retirement strategy. As an example, it could be a person who retires from 40-hour-a-week employment, takes a part-time job, and draws Social Security and/or a small amount from his/her retirement account. In this form, the possible configurations of phased retirement are endless: part-time work, independent consulting, or seasonal employment combined with irregular withdrawals, or period certain annuity payments, etc.

However, some versions of phased retirement may actually require some restructuring of pension and retirement plans. Consider the situation of a long-term employee with a high level of technical skill and experience. The employer may find great benefit in retaining this employee, even on a part-time basis, so a plan where the employee works three days a week and draws a partial retirement might seem ideal for both parties.

But what if most of the employee's retirement assets are held in the company's 401(k), or are in the form of a company pension? Many retirement plan rules prohibit active employees from receiving retirement plan distributions while still employed. And if there is a pension plan, how will the employee's ongoing earnings affect payments they are receiving concurrently?

Even if you think your accumulation plans are on track, there may a phased retirement in your future. Numerous studies have shown that older workers are valued for their experience, knowledge, work habits, commitment to quality, and proven ability to work in a team environment. Regardless of age, good employees are worth retaining, and as the population glut from the baby boom generation recedes, it is becoming harder to find younger replacements. Especially if you are an employee with highly specialized skills and a long tenure with one employer, you might receive an offer that's too good to refuse.

The concepts contained in a phased retirement program also upend some paradigms of conventional retirement planning. It is possible, even likely, that a phased retirement program will experience income ebbs and flows. There may be periods when the need to supplement income from assets is quite high, but these times could be followed by stretches where the individual has excess income and is saving during retirement. This fluctuating state of affairs could greatly impact decisions about where funds should be allocated, and which ones should be distributed. Given these changing dynamics, it may be time for you to consider phased retirement strategies and the types

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