Is Phased Retirement Better Than Retiring All at Once?

What Is Phased Retirement?

Phased retirement is a gradual transition from full-time work into retirement. Instead of stopping work on one specific date, you reduce your hours, consult, work part-time, or pursue flexible employment while beginning to use retirement income and savings.

For many years, retirement was viewed as a single milestone. You worked until a certain age, celebrated your last day on the job, and never looked back.

Today, retirement often looks very different.

Many people want more flexibility than previous generations. They may enjoy their careers but no longer want to work full-time. Others want additional income while they travel, volunteer, or spend more time with family. Some simply aren’t ready to give up the sense of purpose and routine that work provides.

That’s where phased retirement enters the conversation. Rather than moving instantly from full-time employment to full-time retirement, you gradually adjust your work schedule as your lifestyle and financial needs evolve. For many people, this creates a smoother transition both financially and emotionally.

Neither approach is universally better. The right decision depends on your financial situation, health, career goals, lifestyle preferences, healthcare needs, and retirement income strategy. Many people find that a gradual transition provides additional flexibility while allowing them to adjust financially and personally to retirement.

As Chicagoland financial professionals at SGL Financial, we help clients evaluate whether gradually transitioning into retirement may better align with their financial goals and personal priorities than retiring all at once.

The answer is different for everyone, but understanding the advantages and tradeoffs of each approach can help you make a more informed decision.

Read our latest quick guide: Will Your Retirement Plan Limit Your Future Choices?

What Are the Financial Benefits of a Gradual Transition Into Retirement?

One of the greatest advantages of a phased retirement is the flexibility it can provide. By continuing to earn income, even on a part-time basis, you may be able to rely less on your retirement savings during the first few years of retirement.

For example, if your retirement plan calls for withdrawing $80,000 annually from your investment portfolio, but consulting or part-time work generates $30,000 per year, you may only need to withdraw $50,000 during that time. Preserving more of your savings in the early years can create additional flexibility as you transition into retirement.

A gradual retirement may also allow you to:

• Delay withdrawals from your investment accounts.
• Postpone claiming Social Security, if it aligns with your overall strategy.
• Continue contributing to retirement accounts, if you’re eligible.
• Maintain larger cash reserves for unexpected expenses or future opportunities.
• Ease into a new spending routine rather than making an immediate financial adjustment.

Every retirement journey is unique, but having multiple income sources during the transition can expand your planning options and provide greater financial flexibility.

How Can Part-Time Work Support Your Retirement Plan?

Not everyone works during retirement because they need additional income. Many people simply enjoy remaining engaged. Work provides more than a paycheck.

It often provides:

• Daily structure
• Professional relationships
• Intellectual stimulation
• A sense of accomplishment
• Opportunities to mentor others
  

Some retirees discover that completely stopping work is a bigger adjustment than they expected, so a phased retirement allows you to maintain many of those benefits while enjoying greater flexibility over your schedule.

Whether you’re consulting in your current profession, teaching, or pursuing a long-time hobby that generates income, part-time work can become one component of your overall retirement strategy.

Listen to our podcast episode: “Your Investment Strategy Checkup.”

How Does Healthcare Influence Retirement Timing?

Healthcare is often one of the largest, and most overlooked, expenses for people considering retirement before age 65. While many people focus on replacing their paycheck, they sometimes underestimate the cost of replacing employer-sponsored health insurance.

If you retire before becoming eligible for Medicare, you’ll need a strategy for covering both routine medical expenses and unexpected healthcare costs during the transition. Premiums, deductibles, copays, and prescription drug costs can vary significantly depending on the coverage you choose, making healthcare an essential part of your overall retirement income plan.

Before deciding when to retire, it’s helpful to discuss questions like these with a SGL Financial financial planner:

Can you remain on your employer’s health plan?

Some employers offer retiree health benefits or allow eligible employees to continue coverage for a period after leaving full-time work. Understanding what benefits may be available and how long they last can help shape your retirement timeline.

Will COBRA provide temporary coverage?

COBRA allows many employees to continue their existing employer-sponsored health insurance for a limited time after leaving their job. While this can provide continuity of care, you’ll typically be responsible for the full premium, which is often significantly higher than what you paid while employed.

What are the costs of purchasing private health insurance?

If employer coverage isn’t available, you may need to purchase an individual health insurance policy. Premiums vary based on factors such as your age, household income, where you live, and the type of coverage you choose. Comparing these costs before retiring can help you create a more realistic retirement budget.

How will healthcare premiums fit into your retirement budget?

Healthcare costs don’t stop once you retire. In many cases, they increase over time. It’s important to consider how insurance premiums, out-of-pocket medical expenses, dental and vision care, and potential long-term care costs fit alongside other retirement expenses, including housing, travel, and everyday living.

Looking at healthcare alongside your investment strategy, retirement income, and tax planning can provide a more complete picture of your long-term financial plan and help you make more informed retirement decisions.

Could a Gradual Retirement Help During Market Volatility?

Imagine retiring just as the stock market experiences a significant decline. If your retirement income depends entirely on withdrawals from your investment portfolio, you may have little choice but to sell investments to cover your monthly expenses, even when account values are temporarily down.

This can be especially challenging during the first several years of retirement, when your portfolio is shifting from accumulating assets to generating income. While markets have historically recovered from downturns over time, withdrawing assets during periods of lower valuations may reduce the amount that remains invested for future growth.

Now consider a different scenario.

Instead of fully retiring, you’re earning income through part-time work, consulting, or seasonal employment. Even if that income covers only a portion of your monthly expenses, it may reduce the amount you need to withdraw from your retirement accounts during a market downturn.

For example, if your retirement budget requires $7,000 per month and consulting income provides $2,500, you may only need to withdraw $4,500 from your portfolio rather than the full amount. Over several months, or even a few years, that added flexibility can help you navigate periods of market volatility with more options.

Think of it like having multiple backup generators during a power outage. If one power source becomes temporarily less reliable, another can help keep everything running until conditions improve.

This doesn’t mean part-time work can prevent market declines or eliminate investment risk. Rather, it demonstrates how having multiple sources of retirement income, such as employment earnings, Social Security, pensions, cash reserves, and investment withdrawals, can provide greater flexibility when markets are less favorable.

Retirement Is Also an Emotional Transition

Financial planning often focuses on numbers, but retirement is also a major lifestyle change. After spending decades building a career, many people find that retirement creates questions they hadn’t fully considered.

• How will I spend my time?

• What will give me purpose?

• How will my daily routine change?

• How will I stay engaged and connected with others?

These questions don’t have financial answers, but they often influence financial decisions.

A phased retirement gives you an opportunity to adjust gradually instead of experiencing all of those changes at once. For many people, that transition feels more natural.

Read: “Why Most People Get Emergency Funds Wrong”

How Do You Know Which Retirement Path Is Right for You?

There isn’t one retirement timeline that’s right for everyone. Instead, the decision often depends on factors such as:

• Your retirement savings
• Your desired lifestyle
• Your health
• Your spouse’s plans
• Healthcare costs
• Social Security timing
• Tax considerations
• Your enjoyment of work
• Your family priorities

At SGL Financial, our retirement planners in Buffalo Grove, Illinois often encourage clients to evaluate several retirement scenarios rather than building their plan around only one date. 

For example, your plan might compare:

Those withheld benefits aren’t permanently lost. Instead, they’re factored back into your benefit calculation once you reach FRA. However, the earnings test may influence whether claiming benefits early makes sense while you’re still working.

Once you become eligible for Medicare, your income may also affect your monthly premiums. Medicare uses a surcharge known as the Income-Related Monthly Adjustment Amount (IRMAA) to determine whether higher-income retirees pay more for Medicare Part B (medical insurance) and Part D (prescription drug coverage). Because IRMAA is based on your modified adjusted gross income from two years earlier, additional consulting income, part-time wages, Roth conversions, or large retirement account withdrawals could increase your Medicare premiums in future years.

This doesn’t necessarily mean you should avoid working during retirement. Instead, it highlights why retirement decisions are often interconnected.

The timing of your retirement, when you claim Social Security, how much you earn from part-time work, and how you withdraw money from your retirement accounts can all influence your taxes, healthcare costs, and overall retirement income strategy.

Why Consider SGL Financial for Retirement Planning?

We use a comprehensive, personalized approach to retirement planning. Rather than focusing only on your investment portfolio, we help you evaluate how your retirement income, Social Security strategy, taxes, healthcare costs, cash flow, and long-term goals fit together.

Whether you’re considering retiring next year, transitioning gradually over several years, or you’re already retired and reassessing your plan, we’re here to help you evaluate your options and build a strategy that reflects your unique priorities.

Let’s connect to discuss your retirement timing strategy.

Retirement Timing Frequently Asked Questions

1. Can I work part-time after I retire?

Yes. Many people choose to continue working part-time, consulting, or pursuing flexible work opportunities after leaving full-time employment. Beyond the potential financial benefits, continuing to work may provide structure, purpose, and a gradual transition into retirement. The financial and tax implications will depend on your individual circumstances.

2. Does phased retirement affect Social Security?

It can. The decision of when to claim Social Security benefits, along with any earned income before reaching full retirement age, may impact your overall retirement strategy. Coordinating your Social Security timing with your broader income plan can help you make a more informed decision.

3. Is phased retirement better for taxes?

It may be. Depending on your income sources, retirement account withdrawals, and overall strategy, spreading income over multiple years may create different tax considerations. Thoughtful coordination between retirement income planning and tax planning can help you make the most of your available options.

4. Should I retire before Medicare begins?

Retiring before age 65 requires planning for healthcare coverage until Medicare eligibility begins. Health insurance costs can be a significant retirement expense, so it’s important to include them as part of your overall retirement plan.

5. Can phased retirement help during market downturns?

It can provide additional flexibility. Continuing to earn income during the early years of retirement may reduce the amount you need to withdraw from your investment accounts during periods of market volatility. This may allow your portfolio more time to recover during challenging market conditions.