Why More Americans Are Choosing Phased Retirement

Phased retirement is becoming more common among Americans who plan to leave full-time work gradually, according to a Fidelity Investments study released in March. Financial advisors say continuing to earn income can reduce withdrawals from investment accounts and help clients adjust to life after a full-time career.

The study found that 35% of respondents planned to take gig work or side jobs, while 29% intended to start a small business. Another 26% planned to do part-time consulting, and 20% expected to change industries.

Some clients choose phased retirement to remain engaged, maintain a sense of purpose or explore another type of work. Others begin the transition after leaving full-time employment earlier than expected. Advisors said the choice is not always driven by a lack of savings.

Continuing to earn income can reduce pressure on retirement portfolios during market declines. It may also allow clients to delay claiming Social Security, which can increase their eventual monthly benefits, according to Canon Price, a senior financial advisor at Signature Estate & Investment Advisors in Century City, California.

Price has worked with clients who fully retired and later sought part-time jobs or board positions after losing their daily routine and professional identity. “I find that as a financial advisor, I’m not just giving financial advice on their portfolios, but I’m giving them emotional advice,” Price said. “Everybody’s identity is so wrapped up in their work, right? And everybody wants to make sure they’re having purpose and a way to contribute.”

A gradual exit can give clients more time to adjust to a different schedule, Price said. Clients who continue working part time may also be able to keep more of their portfolios invested for growth because they are still earning income. Price said phased retirement is becoming more common among women, who generally live longer.

Clients without long-term care insurance may also use additional working years to build savings if they develop health conditions that require care for more than three to five years, Price said.

Thomas Pontius, director of financial planning at Kayne Anderson Rudnick Investment Management in Los Angeles, said clients do not always plan phased retirement years in advance. Some consider it when they are uncertain about how they want to spend their time after leaving full-time work.

“Retirement is one of the hardest transitions that I have seen for clients, and it’s not a financial transition — it’s a psychological transition,” Pontius said. Clients must adjust to leaving the workplace, taking money from their accounts instead of contributing to them and seeing account balances decline.

Some people retire early or are required to leave full-time work at a set age. Greg Dillon, a partner and senior wealth manager at Prosperity Capital Advisors in Red Bank, New Jersey, has clients at public accounting firms that require retirement at age 60. Some of those clients later work as consultants because they believe they can continue contributing.

The change in income can create tax-planning opportunities. Clients with lower consulting income may consider converting money from traditional retirement accounts to Roth individual retirement accounts before required minimum distributions begin. Dillon said some may also be able to realize investment gains while qualifying for the 0% long-term capital-gains tax rate.