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Phased Retirement - Three Financial Strategies to Consider Before Electing

| April 04, 2019
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Are you close to retirement but not quite ready to go from working full-time to not-working-at-all? The good news is that you may be able to have your cake and eat it too. That’s because most universities offer some version of a Phased Retirement Program designed for faculty members seeking an opportunity to scale back and ease into retirement over a specified number of years.  

However, determining if this option is right for you—and if you are financially prepared to enter into this beginning phase of retirement—takes some planning. That begins with understanding what phased retirement is and how it works.

What is phased retirement?

The Phased Retirement Program provides an opportunity for eligible full-time tenured faculty members to transition into retirement, typically over a period of one to five years, depending on the campus. Faculty members resign their full-time position and give up tenure in return for the right to work half-time at half-salary for a given number of years.

While the Program is entirely voluntary, it must be entered into through a formal, written agreement between an eligible faculty member and their institution. Once made, the decision to enter the Phased Retirement Program is non-revocable and binding. Participating faculty members initially receive a salary equal to fifty percent (50%) of the full-time salary they received immediately prior to phased retirement. Subject to any limitations imposed under the North Carolina State Retirement System and the legislative appropriations process, participating faculty members are eligible for salary increases and merit pay in subsequent years of Program participation based on annual evaluations.

Once you enter the Program, you may begin receiving benefits accrued under either the Teachers’ and State Employees’ Retirement System (TSERS) or the Optional Retirement System (ORP), but you are not required to do so. Contributions to the TSERS and ORP retirement plans will cease upon entering into the Program, but you will still be able to contribute to your 403(b) or 457(b) retirement plans. However, you will no longer be eligible to contribute to the NC 401(k) plan. 

What are the benefits of phased retirement?

From a lifestyle perspective, phased retirement has many benefits such as providing more time to spend with family and friends and an opportunity to focus on other interests and activities that you may have had little time for while working fulltime. It allows you to continue doing what you love while easing into the next exciting phase of your life. The Program can also provide a valuable option for faculty members nearing retirement who feel they have additional earnings potential from off-campus opportunities.

Planning for your Income Needs

When considering a phased approach to retirement, income replacement is a key consideration for maintaining your lifestyle and helping to accomplish your goals. Under phased retirement, you’ll continue to receive 50% of your salary. However, any remaining income needs must come from other sources, such as ORP, 401(k), 403(b) and/or 457 retirement plan distributions, Social Security retirement benefits and personal savings.

Determining if you will have sufficient income to cover all of your expenses and maintain your desired lifestyle requires a full analysis of all of your anticipated income sources and expenses during the phased retirement period. Considerations include when to claim Social Security, how healthcare insurance premiums and out-of-pocket expenses will be covered if you and/or your spouse are under age 65 and not yet eligible for Medicare, and how your income must increase over time to outpace inflation. The final step is identifying strategies to help you make the most of your transition from pre-retirementtophased-retirement to full-retirement. Such strategies might include:

Strategy #1: Continue accumulating retirement savings on a pre-tax basis

Once you enter phased retirement, you can continue making contributions to 403(b) and 457(b) plans during the phased retirement period (you cannot continue to contribute to the NC 401(k) plan, however). Doing so will allow you to increase your retirement savings, take advantage of tax-deferred compounding, and lower your current-year taxable income.

Strategy #2: Create a dependable income stream

If you are not part of the TSERS plan and have no other pension plans, you may want to open a TIAA 403(b) or 457(b) account and use their TIAA Traditional subaccount and annuitization options to create a “pension” base for your required income stream in retirement.

Strategy #3: Open additional university retirement accounts that can only be opened before you retire.

As opposed to IRAs, workplace related 403(b), 457(b), and 401(k) plans can typically only be opened while you are an active employee of your institution. If there are certain workplace retirement plans with unique benefits, such as a brokerage window providing expanded investment options along with a guaranteed fixed account, as can be found in the UNC Fidelity 403(b) and TIAA 403(b) plans, then you want to make sure those accounts are opened before transitioning to full retirement.

While much information is available to university faculty members about the mechanics of the Phased Retirement Program—from eligibility to which benefit programs are retained during phased retirement—you may find yourself in need of help in planning for the financial impact of phased retirement. Preplanning now not only helps to ensure you understand all of the options available to you but will also give you an opportunity to put the strategies in place that are right for you and your family well before choosing this unique benefit. This is where working with a Certified Financial PlannerTM professional (CFP®) who is familiar with your university benefits and experienced in working with university retirees may help you find the answers you seek.  

Need Help Determining The Best Course Of Action For You?

If you're not sure what to do in your unique situation, just click Schedule An Introductory Call and we can help you determine whether rolling your old retirement plans into your current employer retirement plan makes sense for you. 

Peter Hynes, CFP®

Verity Asset Management


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