The financial advantages of phased retirement

Phased retirement is tempting, but is really to your advantage? There's nothing like an example to show the change in the annual income of a worker who chooses to gradually leave the work force.

By working full time, Manon earns 50 000 $ a year. At age 55, she will be entitled to an unreduced pension of 30 000 $ a year from her defined benefit pension plan. Let's see what Manon's yearly earnings could be if she makes an agreement with her employer to reduce her work week to 3 days as of age 55.

Yearly income from age 55 to 60

Yearly earnings (working 3 days a week)	30 000 $
Phased retirement benefit (60% of the unreduced yearly retirement pension )	18 000 $
Total	48 000 $

Yearly income from age 60 to 65

Yearly earnings (working 3 days a week)	30 000 $
Phased retirement benefit (60% of the unreduced yearly retirement pension )	18 000 $
Pension under the Québec Pension Plan (QPP) (maximum amount at age 60)	7 634 $
Total	55 634 $

Yearly income at age 65 (full retirement)

Pension from her pension plan	30 000 $
Supplement from her pension plan	6 000 $
QPP pension	7 634 $
Retirement pension supplement (QPP)	663 $
Total	44 297 $

It is obvious that by working less and receiving a phased retirement benefit under her plan, Manon maintains her level of income. From age 55 to 60, she will receive, in addition to her part-time salary, a maximum phased retirement benefit of 60% of the pension to which she is entitled (60% of 30 000 $). The same is true for her yearly income between ages 60 and 65. As of age 60, however, she can receive her pension under the Québec Pension Plan, which increases her income to 55 634 $ for this period of time.

At 65, if she chooses to leave the workforce altogether, she will receive her full pension under her pension plan. Phased retirement allows Manon to continue accumulating benefits under the pension plan offered by her employer, which leads to an increase in her pension when she fully retires. By continuing to contribute to the Québec Pension Plan, she will also be entitled to a retirement pension supplement of 663 $ a year.

Important!

This example is designed to show certain advantages to phased retirement. Since each situation is different, phased retirement may not be for you. It all depends on your plan's provisions and the conditions your employer offers. Before making a decision concerning phased retirement, do not hesitate to consult a financial planner.