Phasing into Retirement

For many of us, retirement is more of a process than an event. Rather than a hard stop where one day we’re working and one day we’re not, many of us will reduce our hours, or move to a less stressful, lower-paid job for a few years before we finish altogether. We've looked already at why we need to be well-prepared for this.

Phasing retirement is easier than ever thanks to flexible pensions, and today I want to run through the practicalities and the implications of retiring gradually. Phased Retirement is a technical term relating to pensions, and we’ll get to that as we go, but I’ll also probably use it to talk about the process, rather than the event of retiring.

Phasing Comes in Many Forms

Let’s cover off the life practicalities of phasing into retirement first. Maybe you’ll reduce your hours, or take a lower-paid job or something similar. What will this mean? Well, the obvious implication is that your income will reduce and so we need to be prepared for that.

How will you make up the difference? Do you have pension schemes or other secured income that will kick in to fill the gap? Do you have capital reserves you can draw from? Phasing into retirement might not actually mean you change your job, but instead you might stop paid work altogether, and opt for volunteer work. Obviously this will pay you nothing, and so the impact will be greater than taking lower-paid work.

If you’re in a relationship, then the phasing might happen between you, with one partner stopping work first and then the other a few years later. This too will have an impact on your income. There are lots of ways to phase the practicalities of stopping work.

Phasing Allows a Period of Adjustment

Whichever way you choose to do it, phasing allows a period of adjustment. This is both financial, in that you can stagger your reduction in income over time, and physical in that you can still maintain some level of routine and work, even if that work isn’t paid.

I’m a big believer in structure to the day and the week, and phasing allows you to maintain this to some degree, or at least adjust your routine gradually, rather than abruptly. Retirement represents a massive change, which I’ve referred to before as ‘the great transition’, and sudden, radical change isn’t always a good thing, even if it is planned and expected.

Physical changes from full-time employed to waking up the Monday after you’ve retired with no work to go to, is potentially dangerous. That’s a strong word, but we’ve all seen people who have worked like dogs up to their retirement and then drop dead shortly after.

What a terrible thing! While I’m sure there are many factors involved when it does happen, I do wonder if the sudden change of tempo isn’t a pretty big part of it. Adjusting over time then, may make more sense if it’s practical to do so.

Financially, reducing your earned income over time gives you chance to adjust your spending IF you need to. Or, if you’re topping up your spending account by drawing from capital, it gives you chance to settle in to see how that pans out practically, and can ease you into the so-called decumulation phase. We’re going to cover how you should position a portfolio for long-term investing later on.

OK, let's now look in more detail at phased retirement.