Phased Retirement: A Gradual Path to Financial and Lifestyle Freedom

“When do you retire?”

“Well, what do you mean by retire, exactly?”

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Retirement dates blur now more than ever. Instead of moving from full-time work to full-time retirement overnight, more individuals are choosing to reduce hours, shift roles, or consult part-time to create a gradual transition to full-time retirement.

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Many Baby Boomers and Gen Xers are drawn to the idea of continuing to work in a different capacity. A recent Transamerica study found that nearly two-thirds of workers across generations hope to work during retirement, often for enjoyment rather than financial need¹. The gradual transition provides a continued sense of purpose, routine, and social connection while supporting financial stability for those wondering if they’re on track for retirement.

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In this article, we’ll look at the possible advantages of phased retirement, strategies for structuring it with your employer, and key financial planning steps that can support a smooth shift into your next chapter.

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The Benefits of Phased Retirement

Phased retirement allows you to gradually step away from full-time work while staying active, engaged, and financially supported.

Supporting Mental and Social Well-Being

Remaining involved in some form of work helps maintain structure, purpose, and connection. Research from AARP shows that continued engagement post-retirement can reduce the risk of cognitive decline and improve mental health². Whether mentoring, advising, or simply keeping a routine, the benefits of staying involved go far beyond financial.

Extending Income and Benefits

Part-time work may allow you to retain access to employer-sponsored healthcare and contribute to retirement accounts. It can also reduce the need to immediately draw from personal savings or file for Social Security, delaying which can increase your monthly benefit by up to 8% per year past full retirement age, up to age 70.

Creating Room for Exploration

A phased schedule gives you time to test new interests or pursue meaningful opportunities like volunteering, family time, travel, or starting a passion project without losing the stability that work can offer. It’s a bridge from one season to another, giving you space to discover what’s next.

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Planning Financially for a Gradual Retirement

As your work and income evolve, your financial strategy should, too. Phased retirement requires thoughtful coordination across several key areas.

Social Security and Withdrawals

One of the most important financial decisions during a phased retirement is when to begin drawing Social Security or tapping into retirement accounts. Continuing to work part-time may allow you to feel comfortable delaying claiming Social Security, which increases your future benefit. For those who wait until age 70, the monthly benefit can be up to 32% higher than at full retirement age.

Likewise, holding off on withdrawals from 401(k)s or IRAs can give those accounts more time to grow, potentially increasing your long-term retirement income. However, suppose supplemental income is needed during the transition. In that case, it’s important to weigh the tax implications of withdrawals and consider the most efficient sequence, like drawing from taxable accounts before tax-deferred accounts.

Managing Cash Flow and Taxes

Even if you're reducing your hours, income from part-time work, investment returns, or consulting can still create tax complexity. You may find yourself in a lower tax bracket, but that doesn’t necessarily mean your tax bill will be simple. Strategic tax planning during this transition can help minimize your liability and avoid surprises at year-end.

Healthcare Costs and Coverage Options

Healthcare is often one of the biggest concerns for those stepping away from full-time employment before age 65. If you’re no longer eligible for employer-sponsored coverage, it’s advisable to plan for how you’ll bridge the gap until Medicare kicks in.

Options might include COBRA coverage, a spouse’s plan, or purchasing insurance through the Health Insurance Marketplace. Evaluating these options in advance can bring continuity in care and cost management.

Rebalancing Investments for Changing Income Needs

As income begins to shift, your investment strategy may also need to adapt. While some clients continue to prioritize growth, others may need to shift toward more income-producing or conservative assets. The right balance depends on your timeline, risk tolerance, and cash flow needs.

A well-diversified portfolio tailored to your evolving income requirements can help you stay on track without sacrificing long-term growth. At Wealthquest, we aim to build investment strategies with flexibility in mind so you can pivot as your phased retirement evolves.

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Navigating the Conversation With Your Employer

Starting a phased retirement often begins with a (possibly intimidating) conversation. But with the right approach, this discussion can open the door to a more flexible and fulfilling next chapter.

How to Propose a Phased Retirement Plan

If you're considering shifting to part-time or contract work, start by clarifying what you’re hoping to achieve. Are you looking to reduce hours? Take on a mentorship or advisory role? Transition your responsibilities over time? Be specific and consider how your continued involvement can benefit your team through knowledge transfer or mentorship. A written plan can demonstrate thoughtfulness and helps set clear expectations.

HR & Benefits Considerations

Policies vary, so talk with HR to understand how reduced hours may impact your health insurance, 401(k) eligibility, or job classification. Some employers offer formal phased retirement programs, while others handle it case by case. Getting agreements in writing helps avoid confusion later.

Retirement Accounts and Coverage

Changes in employment status can affect employer matching, vesting, or access to retirement plans. If transitioning to contract work, be prepared to manage your own tax withholdings, retirement contributions, and health coverage. These changes are often overlooked but can significantly impact your financial picture.

We help clients understand these details and build a plan that helps to keep every part of the puzzle aligned before, during, and after the transition.

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How Wealthquest Helps Clients Embrace Retirement Their Way

No two retirement journeys are the same. Some ease into part-time consulting while others explore volunteering, travel, or time with family. No matter the path, one thing remains true: a coordinated plan can bring you confidence to navigate this season.

Our “All Under One Roof” approach brings together tax, investment, retirement, and estate planning with one coordinated team. That means you avoid juggling professionals or disconnects in your strategy.

If you’re exploring a phased retirement, schedule a conversation with Wealthquest today to create a financial strategy that fits your next chapter.

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