Here’s What You Need to Know About the Phased-Income Approach to Retirement


Retirement income used to be “easy.” Well, not exactly easy, but pretty predictable. One you retired, as long as you limited your withdrawals from your accounts to 4% per year you could be reasonably certain that your money would last as long as you did.

Planning this was way pretty easy too. Just figure out how much you’d want to live on, figure out what larger number that figure was 4% of, and that was your target balance at 65.

But today’s reality is more complicated than that. In addition to market volatility putting that 4% rate into question, those who are approaching retirement now have a long list of other considerations to think about, no less the fact that Social Security now play a smaller role in the average American retirement plan.

This is where phased-income comes in.

What is a phased-income retirement?

Simply put, this is a tax-efficient way of retiring gradually by reducing your working hours and using your pension fund to top up your income until you decide to retire completely.

Think about it like easing into a pool of warm water. Sometimes you want to go slowly to acclimate yourself to what comes next rather than jump in all at once. This can mean anything from cutting back your hours as you approach retirement, reducing your workload or even taking a part-time job once you’re in retirement. Seasonal and temp work are on this list too.

The idea is that you are not 100% retired, and that can help to support your life once you are.

Why would anyone do this?

  • Retain an income stream during the transition that you can use while adjusting to your fixed income plan.
  • Maintain ties to the working world until you’re ready psychologically to quit work entirely.
  • Make up for lost time in your retirement savings by padding your exit from the workforce and delaying claiming Social Security.

AARP’s take: “Phased retirement has no succinct definition. The term phased retirement often refers to a broad range of flexible retirement arrangements, both informal practices, and formal workplace policies, which allow employees are approaching normal retirement age to reduce the hours worked or work for their employers in a different capacity after retirement.” — AARP white paper, 2006

The simple truth is that people today are living longer, meaning they need more money to support their retirement years, and recent changes to Social Security have made it easier to continue working after reaching full retirement age without losing benefits. As of 2021, Social Security allowed for up to $18,960 of earned income per individual before affecting benefits for those who have not reached their full retirement age.

​Takeaway: A phased retirement can be good for retirees, boosting their savings before fully retiring, as well as help business maintain operations over the transition. Yes, there are IRS limits and Social Security rules to keep in mind before you keep working beyond full retirement age, but you can expect to hear a lot more about phased income retirements going forward as the American retirement continues to evolve.


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