Why clients are choosing phased retirement — and what advisors should know

• Key insight: Phased retirement is not necessarily an emergency financial fallback but rather a purpose-driven lifestyle bridge, upending traditional decumulation assumptions and prompting advisors to reevaluate conventional timing for lowering risk in portfolios.
• Expert quote: "Retirement is one of the hardest transitions that I have seen for clients, and it's not a financial transition — it's a psychological transition." — Thomas Pontius, Kayne Anderson Rudnick Investment Management
• Supporting data: A Fidelity Investments study found 61% of Americans plan to transition gradually into retirement rather than stop working entirely, and 35% of respondents plan to take on gig work or side hustles while 29% intend to start a small business.

For financial advisors, retirement planning increasingly means guiding clients through a transition rather than a clean break from work. 

Processing Content

"Phased retirement" — transitioning out of full-time work while continuing to earn income in a different capacity — presents advisors with both planning opportunities and challenges. Clients who leave a traditional 9-to-5 job don't necessarily continue working out of financial necessity. They may want to stay engaged in work they enjoy, maintain a sense of purpose or explore new interests, advisors said.

A Fidelity Investments study released in March found that 61% of Americans reported planning to transition into retirement. Among respondents, 35% said they plan to pursue gig work or side hustles, 29% plan to start a small business, 26% plan to do part-time consulting and 20% intend to switch industries.

Continuing to earn income could reduce strain on retirement accounts during market fluctuations and help retirees afford to delay claiming Social Security benefits, thereby increasing their payment amounts, said Canon Price, a senior financial advisor at Century City, California-based Signature Estate & Investment Advisors.

Price said she has some clients who fully retired but are now "kind of going nuts with nothing to do." To alleviate that, they are looking to work part time or serve on boards.

"I find that as a financial advisor, I'm not just giving financial advice on their portfolios, but I'm giving them emotional advice," she said. "Everybody's identity is so wrapped up in their work, right? And everybody wants to make sure they're having purpose and a way to contribute."

Easing the transition out of full-time work

For some, leaving the workforce can be jarring when they "realize that their entire daily rhythm has been tied to work," Price said. 

Phased retirements facilitate a gradual transition out of full-time work and allow clients "to be able navigate and transition with more intention rather than shock," she said.

Clients who continue to work part time also have the benefit of keeping their portfolios more aggressive than those who have fully retired. That can help them afford longer lifespans, she added.

Phased retirements are becoming more common, especially for women, who tend to live longer, said Price. Also, clients who didn't allocate money to long-term care insurance might find themselves needing more savings if they develop illnesses that last longer than three to five years.

Clients might not plan a phased retirement far in advance but rather when they are unsure how they want to spend their time during retirement, said Thomas Pontius, director of financial planning at Los Angeles-based registered investment advisor Kayne Anderson Rudnick Investment Management.

"Retirement is one of the hardest transitions that I have seen for clients, and it's not a financial transition — it's a psychological transition," he said. In addition to the major change of not being part of a workplace, clients must adjust to taking distributions rather than making contributions to their accounts and watching their balances go down instead of up.

When early retirement leads to a second act

Some clients choose to retire early, even in their 30s or 40s, as part of the financial independence, retire early (FIRE) movement. While this might not be feasible for everyone, those who pursue it could need unique planning strategies, especially if they intend to continue working in some capacity.

Clients may also be forced into early retirements, creating another path to phased retirement.

Greg Dillon, partner and senior wealth manager at Red Bank, New Jersey-based registered investment advisor Prosperity Capital Advisors, said he has clients who must retire at age 60, as dictated by the public accounting firms where they work. Yet these clients still feel young and believe they can bring value, so they often become consultants.

For clients like these, the transition out of full-time work can create tax-planning opportunities. It might make sense to do Roth IRA conversions while they are in lower tax brackets, before they have to start taking required minimum distributions. Some clients "have done too good of a job saving into pre-tax accounts," he said.

To reduce taxes, it could be advantageous to realize capital gains during that period of earning a small amount of consulting income and being in the 0% capital gains bracket, Dillon said.

"That could be the ideal time," he said.

Introductory bullet points created by AI with editorial review.