Preparing for a Phased Retirement: Steps and Considerations

Overview

Phased retirement is a deliberate, gradual approach to leaving the workforce: instead of stopping work abruptly, you reduce hours or responsibilities, often with continued access to pay, benefits or partial pension income. This pathway can lower the financial and emotional shock of full retirement, letting you test a new daily routine while keeping professional purpose and income.

In my practice I’ve seen phased retirement reduce regret and financial stress when it’s backed by a written plan. Couples often use phased retirement to stagger retirements so household income remains stable while both partners adjust to retirement life.

Sources: AARP’s phased retirement guidance (AARP) and the IRS summary of retirement-plan tax rules (IRS) are helpful starting points for employer and tax questions.

Who can use phased retirement?

Phased retirement is possible for many workers but availability depends on employer policy, job type and benefit rules. Typical candidates:

• Employees aged roughly in their mid-50s to mid-60s who want to cut hours rather than quit.
• Professionals with institutional knowledge who can move into mentoring or consulting roles.
• Workers eligible for partial pension payouts under plan rules.

Note: eligibility rules vary. Many employer-sponsored retirement plans use a minimum-hours rule (often 1,000 hours in a plan year) to determine contributions and vesting — confirm specifics with HR and your plan documents.

Concrete steps to prepare for a phased retirement

Below is a step-by-step framework you can follow, including sample timelines and negotiation tips.

1. Clarify your goals (6–24 months before transition)

• Decide why you want phased retirement: more free time, reduced stress, caregiving, or a soft landing to full retirement.
• Define the lifestyle you want (travel, volunteer, part-time work) and estimate the annual cost.

1. Run financial scenarios (6–18 months)

• Build a cash-flow model for several scenarios: remain full-time, reduce to 75% hours, 50% hours, or move to contract work. Include salary, employer benefits value, and projected withdrawals from retirement accounts.
• Evaluate Social Security claiming strategies — working while claiming before full retirement age (FRA) may temporarily reduce benefits under the SSA earnings test; rules change annually, so check the Social Security Administration for current thresholds (SSA).
• Check required minimum distribution (RMD) rules for tax timing. As of 2025 many retirees are subject to RMDs starting at age 73, but verify your situation with the IRS and your advisor.

1. Inventory benefits and employer rules (3–12 months)

• Confirm how reduced hours affect health insurance eligibility, life and disability coverage, 401(k)/pension contributions and vesting. Ask HR for written confirmation.
• If you have a defined-benefit pension, ask whether partial payouts or early retirement options exist and how they affect survivor benefits.

1. Understand taxes and Social Security (3–12 months)

• Expect a mixed income tax picture: wages taxed as ordinary income; partial pension payments and Social Security benefits may be taxable depending on other income. Consult the IRS retirement plans and tax publications for details.
• If you plan to convert retirement assets (Roth conversions), consider timing during lower-earning years in phased retirement to manage tax brackets.

1. Plan healthcare coverage (12–36 months)

• If you will drop to part-time and lose employer coverage, compare COBRA, private plans, ACA marketplace options, and Medicare (if eligible).
• Medicare typically begins at age 65. If you retire earlier, you’ll need interim coverage. See our Medicare planning guide and HSA guidance for strategies to bridge costs.

1. Negotiate and formalize the arrangement (3–6 months)

• Prepare a written proposal for HR/your manager that outlines hours, duties, compensation, benefits, performance expectations and an end date or review cadence.
• Propose a pilot period (6–12 months) with clear evaluation metrics. In my experience, employers are more receptive to pilots than permanent changes.

1. Execute and review (ongoing)

• Re-run your financial plan after 3–6 months to see real impact; adjust hours, savings and withdrawal plans as needed.
• Use the transition to test non-work activities — volunteer roles or a part-time consulting engagement can reveal what you’ll enjoy in full retirement.

Employer conversations: what to ask

• Will reduced hours change my health insurance eligibility or premium contributions?
• How will my pension or retiree benefits be affected? Are partial pension payments possible?
• Will I still be eligible for employer retirement-plan contributions and vesting if hours drop?
• Can we document the phased arrangement (duration, duties, compensation) to avoid misunderstandings later?

Sample negotiation opening (email or conversation):

“I’d like to propose a phased-retirement arrangement that reduces my hours to 20 per week for the next 12 months. My goals are to mentor the team while shifting major responsibilities to younger staff. I suggest a pilot review at six months to evaluate coverage and outcomes. Could HR confirm how this change would affect my benefits and pension accrual?”

Tax, Social Security and retirement-plan details to watch

• Social Security: If you claim early and continue to work, the SSA earnings test may reduce benefits until you reach FRA. Check current limits at the Social Security website (SSA).
• Retirement-plan contributions: Part-time income may limit your ability to contribute to employer plans or IRAs. Confirm contribution eligibility and catch-up rules with your plan administrator.
• Pension reductions and survivor options: Taking a reduced or partial pension can change the survivor benefit amount. Ask the pension office for illustrations.
• Roth conversions: Lower wages during phased retirement can create an ideal window for partial Roth conversions at a lower tax cost — model this with a tax advisor.

Authoritative sources: IRS publications on retirement plans and tax rules (IRS); Social Security Administration guidance on the retirement earnings test (SSA); AARP resources on phased retirement options (AARP).

Healthcare and Medicare timing

Healthcare is the single biggest operational and budget risk in phased retirement. Consider:

• Pre-65 coverage options: If you retire before 65, compare COBRA, spouse’s plan, ACA marketplace plans, and short-term coverage. Don’t assume COBRA is affordable long-term.
• Medicare enrollment: If you or your spouse become Medicare-eligible while you are in a phased plan, check how employer coverage and Medicare interact. Delaying Medicare enrollment can create late-enrollment penalties.
• HSAs: If you have a Health Savings Account, understand contribution limits and how withdrawals for qualified medical expenses remain tax-free. See our guide on How Health Savings Accounts Can Supplement Retirement Planning for details: https://finhelp.io/glossary/how-health-savings-accounts-can-supplement-retirement-planning/

Also read our Medicare planning primer for premium and gap strategies: https://finhelp.io/glossary/medicare-and-retirement-costs-planning-for-premiums-and-gaps/

Common pitfalls and how to avoid them

• Assuming benefits continue unchanged: Always get benefit changes in writing from HR.
• Underestimating the emotional shift: Test your new routine during a pilot period; consider counseling or retirement coaching if you feel identity loss.
• Ignoring tax timing: Plan Roth conversions, Social Security timing and RMDs into your phased-retirement cash-flow model.
• Failing to plan for long-term care: Phased retirement can create a false sense of security about health; integrate long-term-care considerations into your plan.

Example scenarios

1) The teacher who phases to seasonal work: A high-school teacher moves to part-time contract work—maintains health insurance through the district during school months and uses summers for travel, smoothing household income.

2) The executive-turned-consultant: An executive reduces to 60% time and begins billing as a consultant for legacy clients; this approach preserves retirement-plan access while adding flexible income.

3) The nurse reducing clinical shifts: A nurse drops from 40 to 24 hours weekly and fills gaps with per-diem shifts; she keeps clinical engagement and reduces burnout risk.

Practical checklist (what to do this year)

• Build at least two five-year cash-flow scenarios (full-time vs. 50% work).
• Meet with HR to map benefits and eligibility changes; get written confirmation.
• Discuss pension options with the plan administrator and request payout illustrations.
• Consult a tax advisor about Social Security timing, Roth conversions and projected taxable income.
• Re-evaluate health insurance options and Medicare timing.
• Draft a phased-retirement proposal and request a pilot period.

Closing thoughts

Phased retirement is a flexible tool to align income, health coverage and personal goals as you approach retirement. In my experience, the most successful transitions combine clear financial modeling, employer communication, and a pilot period that lets you test the new life before committing fully.

This article links to related planning resources to help you build a robust plan: our guide to Retirement Income Planning for sustainable withdrawals: https://finhelp.io/glossary/retirement-income-planning-creating-a-sustainable-withdrawal-strategy/ and practical HSA strategies: https://finhelp.io/glossary/how-health-savings-accounts-can-supplement-retirement-planning/.

Professional disclaimer: This content is educational and does not replace personalized financial, tax or legal advice. Contact a qualified financial planner or tax advisor to tailor a phased-retirement plan to your circumstances. For official rules on retirement-plan taxes and RMDs, consult the IRS (https://www.irs.gov) and for Social Security rules consult the Social Security Administration (https://www.ssa.gov).