More Americans are phasing in their retirements, and that strategy has its own challenges and advantages. At The Wall Street Journal, Anne Tergesen suggests some considerations for those exploring such a strategy. She writes:
Planning your income
To supplement your phased-retirement pay, you might want to take withdrawals from your 401(k) plan. Many employers allow employees ages 59½ or older to tap their accounts, but some don’t, a detail you’ll find on your plan’s summary plan description.
If you want to continue contributing to your retirement account, find out whether you remain eligible. Once an employee’s hours fall below certain thresholds—often 1,000 hours a year or 500 for long-term part-timers—some 401(k) plans prevent participation. And if your pay declines, your 401(k) contributions, as well as your employer match, might fall, too.
Another way to supplement a phased-retirement salary is to tap into your pension. Congress recently enacted legislation that gives those on the payroll access to their pension checks starting as early as age 59½. But employers don’t have to amend their plans to make that possible. Taking benefits early might lock you into a lower monthly benefit, said Chantel Sheaks, vice president of retirement policy at the U.S. Chamber of Commerce.
Most pension plans weigh factors including an employee’s salary and tenure when calculating pension benefits. If your plan considers the years just before retirement rather than the highest three or five years of pay, going part time at the end of a career might result in a reduced pension benefit, Ms. Sheaks said. Ask your employer about the benefit formula and whether you’ll accrue pension benefits while working part time, she added.
Starting at age 62, individuals can tap Social Security benefits. But doing so then might hurt your finances in the long run, since the longer you can delay claiming between ages 62 and 70, the bigger the monthly benefit you’ll get. Plus, Social Security penalizes many who continue to earn an income before reaching full retirement age, which is 67 for those born after Jan. 1, 1960.
In 2022, for every $2 above $19,560 earned by a Social Security recipient younger than full retirement age, the Social Security Administration reduces his or her benefits by $1. In the year in which the recipient reaches full retirement age, the reduction is $1 in benefits for every $3 earned above $51,960.
Shortly before full retirement age, the deductions stop. Benefits are then raised such that the reductions would be recouped if the recipient lives to about age 80, according to Bill Reichenstein, head of research at SocialSecuritySolutions.com, which sells Social Security claiming advice.
Social Security recipients who earn wage income might also owe income tax on as much as 85% of their benefits.
Andrea Eaton, an adviser in Minneapolis, said phased retirees looking to supplement a part-time income should opt for 401(k) withdrawals over claiming Social Security, especially before full retirement age to avoid any reduction in their Social Security benefits.
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