Phased Retirement: The Case for Not Stopping All at Once

Many people think of retirement as flipping a switch. One day you’re working full time; the next, you pack up your office and never return.

That approach is straightforward, and it works for some. But if you’re five to ten years from retirement and most of your savings are in a pre-tax 401(k) or IRA, stopping all at once puts heavy pressure on your savings when they’re most vulnerable.

Phased retirement offers another option. Instead of stopping work completely, you reduce your hours and work part-time for a while before fully retiring. It’s not for everyone, but it affects your finances in six important ways that many people haven’t considered.

Picture this

Suppose someone is 60 and has decided this is the year. 30 years at the same company, a 401(k) that finally looks like a real number, and a date circled on the calendar.

But here’s what’s often overlooked: The paycheck ends in March, and you need to make your first withdrawal in April. Social Security won’t start for another two years. Medicare is still five years away, and you haven’t figured out the cost of that gap. Every dollar you need until age 62 comes from your accounts, including money for health coverage.

Don’t think of this as a mistake. It’s just what happens when the only thing you decide is your retirement date.

1. The first few years carry the most risk

When the paycheck stops, withdrawals start. Groceries, the mortgage, the utilities are still there. Now all of it comes out of the accounts.

The early years of retirement are different from the rest. If the market drops soon after you retire and you need to sell investments to pay your bills, you’re selling at lower prices, and those shares won’t be there to recover when the market bounces back. If the same thing happens 15 years later, it’s much less damaging.

Earning part-time income can help. If you pay even half your expenses with your earnings, you won’t need to withdraw as much during a bad year, so more of your savings can stay invested and recover.

You don’t need part-time work to match your old salary. You just need it to reduce how much you have to sell from your savings.

2. The coverage gap between your last day and 65

If you leave at 60, you have 5 years before Medicare starts. Medicare doesn’t start early, and there’s no exception for having retired.

That gap is one of the biggest expenses in early retirement, and it often determines whether your chosen retirement date is realistic.

Two recent changes make this especially important. The extra premium tax credits that lasted through 2025 have ended. In 2026, the income threshold returns, so if your income is just above the limit, you get no premium credit instead of a smaller one. Even a small income increase can mean you pay much more.

This means your income during those years needs to be part of your plan, not something you figure out later. Where you take money from, and how much, affects your health coverage costs.

Here’s where a phased retirement does specific work. Under the Affordable Care Act, employers with 50 or more full-time employees must offer coverage to employees who average at least 30 hours per week, which the IRS also defines as 130 hours per month. A part-time role at 30 hours a week with an employer of that size can carry benefits.

It’s a specific thing to look for, but it’s worth the effort. Working 28 hours versus 30 hours a week can mean thousands of dollars each year.

3. Part-time income can buy you a larger Social Security check

Many people start Social Security as soon as they’re eligible, simply because they need the money. Between your full retirement age and 70, your benefit grows by 8 percent for each year you wait, according to the Social Security Administration. That increase is permanent, and it applies for the rest of your life.

If you’re married, this affects more than just your own benefit. When one spouse passes away, the survivor usually keeps the higher of the two benefits. That means the higher earner’s filing age sets the minimum benefit for whichever spouse lives longer.

Part-time income can help bridge the gap. Your earnings can pay for groceries and utilities, so you don’t have to claim Social Security early just to cover basic expenses.

This isn’t to say everyone should wait until 70. It’s about making the decision thoughtfully, with all the numbers in front of you.

4. The low-bracket window closes at 75

This next part surprises many people. When you stop working, your taxable income may drop, and you may find yourself in a lower tax bracket than you’ve been in for years.

Most people see this as a nice break and don’t think much of it. But it’s actually a key opportunity for many pre-retirees.

During those years in a lower tax bracket, you can convert money from a traditional account to a Roth and pay taxes at a lower rate. After that, the money grows and can be withdrawn tax-free, and those converted dollars won’t count toward your required minimum distributions later.

This opportunity doesn’t last forever. Required minimum distributions start at age 75 for anyone born in 1960 or later. Once you’re taking Social Security and required distributions, your taxable income goes up again, and the window closes.

Part-time wages can complicate this, so plan carefully. Your earnings add to your taxable income, so you need to balance your wages and conversions. If you convert too much while earning part-time, you could end up in a higher tax bracket than you intended.

5. Know which pocket the money comes from

Phased retirement brings up a question that full retirement doesn’t. Now you have several sources of income: wages, taxable savings, pre-tax accounts, maybe a Roth. Deciding which one to use each month can have important consequences.

The rule people run into first is age. Withdrawals from a traditional IRA or 401(k) before 59 and a half generally trigger a 10 percent penalty on top of ordinary income tax.

There’s an exception worth knowing if you’re leaving a long career. If you separate from your employer in or after the year you turn 55, you can generally take distributions from that employer’s 401(k) without the 10 percent penalty. It applies to that plan, not to an IRA, which means rolling the 401(k) to an IRA the week you retire can quietly cost you the exception.

Plan your cash flow before you retire, not after. For each year, decide where your money will come from and what the tax impact will be. Then compare it to your conversion plan, since the two affect each other.

6. Take the break first

A common concern I hear is this: After working for decades, you want a real break; not just a smaller job starting right away.

Phased retirement doesn’t mean you have to start working part-time right away. You can plan for six months or even a year off first. Use that time to travel, rest, and see what life feels like without a set schedule.

Taking a break also helps you answer a question you can’t know in advance. Work gives you a routine, tasks, and people who rely on you. When all of that stops, some people love the freedom, while others find it harder to fill their days than they thought. You won’t know which one you are until you try it.

Taking a break first lets you find out what works for you before making a big commitment. If you enjoy having an open schedule, that’s great. If you prefer some structure and social time, you can choose a part-time role that fits your interests. Working ten or fifteen hours a week at a nonprofit or in a field you know is very different from your old job.

The questions that tend to stop people cold

When we talk with someone considering this, the math is rarely the hardest part. It’s usually the number of simple questions that still don’t have answers.

• In your first 3 years, how much would you have to withdraw, and what happens to that number if the market falls?
• What will health coverage cost you between your last day and 65, at the income you’re planning on?
• How does your benefit at your full retirement age compare with 70, and what does that do to the survivor’s income?
• How many lower-bracket years do you have before distributions are required at 75?
• If you retire at 56, which account can you actually draw from without a penalty?
• Have you spent a week living the open calendar before committing?

If these questions are tough to answer, that’s completely normal. Almost no one has worked through them intentionally.

Where a phased retirement helps and where it doesn’t

Notice what these six points have in common: None of them rely on predicting the market or choosing the perfect investment. Each is a decision that happens by default if you only pick your retirement date.

Phased retirement isn’t always the best choice. Part-time wages can increase your health coverage costs, limit your ability to do conversions, and if you claim Social Security before full retirement age while still working, your benefit may be reduced if you earn above a certain limit. It’s a set of tradeoffs, not just an upgrade.

This is the kind of planning we help with. We begin by looking at your actual spending and where your income will come from each year. We map out the years between your last day of work and age 75 so you can make the most of the lower tax brackets. We consider coverage, Social Security, withdrawals, and tax planning together, not separately. For taxes, we work with your CPA, and for legal matters, your attorney.

Retirement doesn’t have to be all or nothing. It’s important to know which path you’re choosing and why.

See where you stand

If you want a place to start, the Retirement Confidence Checklist is a short self-assessment covering income, tax planning, investment risk, and how it all fits together. Download the Retirement Confidence Checklist.