Phased retirement programs have long been a tool used by universities to retain key faculty members, facilitate institutional knowledge transfer, manage costs, and attract new talent.
As a professional financial advisor dedicated to helping professors plan for retirement, I’m an advocate for phased retirement programs, but that doesn’t mean they are right for everyone.
And if you’re like many of the clients I’ve worked with over the years, deciding whether it’s right for you may be challenging. In this post, we will explore this issue from various angles, identifying the opportunities and key considerations associated with phased retirement programs.
Understanding Phased Retirement Programs
A phased retirement program is a work arrangement that allows certain faculty members to gradually transition from full-time employment to retirement.
It’s important to note that not all universities offer this option and that programs vary from institution to institution in terms of how they are structured. For instance, The University of Chicago gives eligible tenured faculty the option to work half-time for two-thirds of their base pay for up to five years before retirement. They can take advantage of this option as early as age 50 (provided they commit to working to age 55) and there is no maximum age limit for participation*.
*Interestingly, University of Chicago also offers a lump-sum early retirement incentive that can be used in tandem with the phased retirement program. To do so, however, faculty must retire on or after their 65th birthday and before their 72nd birthday. Faculty who elect not to participate in the early retirement incentive can elect to participate in the phased retirement program any time after age 50.
By contrast, Northwestern University offers a similar two-thirds pay for half-time work arrangement but limits the phased retirement period to three years.
The University of Michigan boasts a highly flexible phased retirement program. To directly quote their website, “Phased retirement must be a reduction in effort; it can be as little as a 1% reduction (ex. going from 100% effort to 99%). The schedule can include multiple, gradual reductions in effort. There is no minimum or maximum length of a phased retirement.”
Ultimately, you’ll want to consult with your dean and your university’s human resources department to determine the specifics of your university’s phased retirement arrangement. Once you’re clear on the particulars, you’re ready to think through some key questions to determine if a phased retirement is right for you.
Key Questions to Consider
Can I afford it?
If you’ve been saving diligently for multiple decades, you may be well-positioned to take advantage of your university’s phased retirement program, perhaps even at a relatively young age. However, it’s vital to ensure that your accumulated assets can support your needs throughout retirement. Conservatively projecting your lifetime expenses is advisable, especially given the potential for factors like inflation, long lifespans, and end-of-life healthcare costs, all of which can increase lifetime spending needs.
If projecting these expenses feels overwhelming, there’s help available. I encourage you to seek guidance from an experienced, fee-only financial planner with expertise in university retirement plans.
How will I afford it?
Let’s say you’re interested in a phased retirement but have determined that the associated reduced income will not be sufficient to meet your needs. You will need to tap into other assets to supplement your income. This can be done successfully, but it requires careful planning.
Many people assume that they can turn to Social Security to fill the gap, but those under full retirement age may be in for a rude awakening. Social Security benefits collected while still working may be subject to the “Earnings Test”, which reduces Social Security benefits for those whose earned income exceeds certain thresholds. In other cases, retired persons may be subject to the “windfall elimination provision,” which can reduce their Social Security income, depending on how their pension program is structured or if their institution does not pay into Social Security. This is another instance where consulting with a professional, fiduciary financial advisor can be of tremendous benefit.
It’s possible that your university will allow you early access to funds accumulated in your retirement plan(s)—for example, a 403(b), a 457 plan, and others—but it is not guaranteed. This, along with the many other variables, highlights the need to meet with your dean and your HR representative to ensure that you understand the specifics of your university’s program.
Of course, Social Security and qualified retirement plans may not be the only or the best options available to you. You may also have access to significant bank savings or a taxable investment portfolio. In rare cases, it may even make sense to explore loan options or utilization of home equity. Ultimately, it’s essential to understand all available options and choose the path that is most prudent in your situation.
What will I gain?
As with any major life decision, it’s important to establish a clear “why” behind your choice to phase into retirement. In conversations with clients, I often frame this as “running from” vs. “running towards”.
There are likely to be certain aspects of your current day-to-day work life that you’d like to run from (committee work, administrative responsibilities, etc.), but retirement, phased or not, should be about more than shedding stressful or burdensome obligations. In other words, you need to know what you are running toward.
Phasing into retirement will give you more time to enjoy life outside of work. What exactly do you want this to look like? More free time is great, but free time without a plan for how to use it can be surprisingly disorienting.
The more thought you put into how you’ll spend your time during your phased retirement years, the more likely you are to make the most of them.
And remember, there’s tremendous upside here. You’ll never be younger than you are right now, and you may never be healthier. Phased retirement gives you the opportunity to take full advantage of this by spending your precious “go-go” years on pursuits that feel personally meaningful.
What will I lose?
Jonathan Clements, personal finance author and founder of The Humble Dollar, recently published a thought-provoking piece called “What We Lose”, in which he identifies seven losses that often accompany retirement: income, identity, purpose, structure, community, relevance, and power.
It’s no wonder that retirement has been shown to have a potentially detrimental impact on mental health.
Herein lies one of the most compelling aspects of phased retirement. You don’t have to lose these things all at once. Phased retirement gives you the opportunity to smooth the transition, to methodically focus on replacing that which is lost with equal or better substitutes.
I cannot overstate the importance of this. I’ve seen many retirees struggle with their mental health in their first few years of retirement.
To retire in phases is to experience Clements’ seven losses in phases. This doesn’t mean it will be easy, especially for those whose identities are especially intertwined with their contributions as a professor, but it will likely be much easier than ripping the Band-Aid off all at once.
The decision to accept a phased retirement plan offered by your university is a deeply personal one, and it requires careful consideration of various factors.
We’ve helped many professors navigate the questions outlined above. If you’d like to consider partnering with us to plan your own phased retirement, you can schedule a no-obligation introductory call here.