A new way to phase into retirement

Monday, July 30, 2007

If you’re planning to retire in five or 10 years, you may feel both anticipation and anxiety as you prepare for this next phase in your life.

While you may be looking forward to traveling or spending more time with loved ones, you may not be looking forward to a potentially abrupt change from working full-time for a company to planning your own time every day as a retiree.

To soften this transition, some baby boomers are exploring a middle path: phased retirement.

This emerging option enables you to gradually reduce your work hours while maintaining your pre-retirement income through a partial pension and a partial salary.

A growing number of the baby boomer generation is expressing an interest in phased retirements.Further, of the workers who expressed an interest in phased retirement, nearly four in five said that the availability of phased retirement would encourage them to work past their expected retirement age.1

Phased retirement and other alternatives that encourage workers to voluntarily remain in the workforce longer benefit employers and employees. Employers retain their most experienced, skilled employees.

Employees can boost retirement savings, accumulate additional Social Security benefits and continue working at reduced hours.

Additionally, other recent studies suggest that working longer improves physical health and emotional well-being. A 2005 study, the New Retirement MindscapeSM, conducted by Ameriprise Financial, Age Wave and Harris Interactive, revealed five distinct emotional stages of retirement, including a reorientation phase where retirees reconcile the realities of retirement with their own expectations.

The research uncovered a group of retirees, the “Empowered Reinventors,” who successfully addressed the challenges of reorientation through planning and preparation to achieve high levels of fulfillment and empowerment.

Over one-third of this group was working full-time, part-time or cycling between periods of work and leisure.2

How do you create a phased retirement program for yourself? The first step is determining if your company pension plan allows it.

During phased retirement, most employees work part-time hours and receive full-time pay derived from part-time income and partial retirement payments

These payouts are called “in-service” distributions because workers receive them while they are still “in service” to their employers.

Current law allows 401(k) plans and other profit-sharing plans to provide “in-service” distributions to qualifying employees.

However, the Pension Protection Act of 2006 recently extended this legislation to traditional pension plans, which cover over 44 million Americans3 – about 20 percent of employees in the private sector3 and about 70 percent of union workers.4

Starting in 2007, the law will allow traditional pensions plans to permit in-service withdrawals to participants who have attained age 62. To find out if your pension plan intends to offer this option, contact your benefits department or plan administrator.

A second step toward phased retirement is working with a qualified financial advisor to help ensure that you have adequate savings and income during all stages of retirement.

He or she can help you evaluate your options and recommend ways to help you meet your goals and address your personal situation.

As you begin researching phased retirement and other options, one helpful resource is the Dream BookSM guide from Ameriprise Financial.

This retirement tool is designed to lead you through the process of writing down your goals and dreams so you can clearly envision your plans for retirement.

To request a free copy, visit ameriprise.com.

This column is provided by Tim Dameron, a senior financial advisor with Ameriprise Financial Services Inc. in Rocky Mount.