Phased retirement trend: How small business owners should respond

Every day this year we will see a record number of Americans reaching the typical retirement age of 65. As the workforce rapidly approaches retirement, there is increasing interest from employers and employees in a phased retirement approach – especially as macroeconomic pressures are weighing on employees.

According to the most recent Principal Financial Well-Being Index^SM (WBI) released in January 2024, among those still in the workforce, gradually decreasing hours is the most desired way of retiring (52%) and is the most preferred method for millennials (56%) and Gen X (67%). As attitudes and expectations continue to evolve, it’s likely that phased retirement will become more prevalent in the near future. In fact, 3 in 4 financial professionals and employers think that by 2030 most participants will be able to take a phased approach to retirement (according to the Principal Future of Retirement Survey, 2023).

However, despite this growing interest from employees, the survey found that most employers do not have experience with offering phased retirement. Only 11% of small and midsized businesses (SMBs) reported they offer phased retirement on a regular basis compared to nearly one quarter of large businesses. Yet, 61% of businesses who don’t offer phased retirement still have employees asking about it. While many SMBs don’t currently have experience with phased retirement, 35% would be willing to consider it as an option. For SMBs looking to implement a phased retirement system, here are some steps to consider:

1. Communicate with employees nearing retirement age. Only 31% of recent retirees included in the survey felt their employer understood their needs as they moved toward retirement, yet SMBs are uniquely positioned to be able to understand the needs of their employees. Start the conversation early about how to prepare for retirement or about options to stay with the organization in limited capacity.
2. As an employer, consider if there are opportunities to provide access to financial professional advice for your employees, especially as they near retirement. Across all generations, most employees surveyed ranked saving for retirement as their number one financial priority; they must strike a balance between balancing basic needs with long-term financial planning. A financial professional can help employees navigate their personal situations – health care costs, dependent care obligations, Social Security decisions, and converting retirement savings into lifetime income.
3. Consider knowledge transfer and employee succession planning early. According to the WBI, most employers (77%) agree that the knowledge that older employees have about their company is crucial to their business’s success. Employers concerned with “having valuable employees retire” are more likely to take actions to either retain them or hire employees who previously retired from other companies.
4. Establish a phased retirement plan for your employees. Work with older employees to keep them on part-time either permanently or temporarily to ease the transition. If your industry is more physically demanding, consider opportunities to transition to a supervisory or supportive office-based role.

Offering a phased approach to retirement not only has financial benefits for employees, but also allows them to stay mentally and socially engaged and provides a sense of purpose and fulfillment. Overall, semi- or previously retired people surveyed in the WBI indicated their primary reason for continuing to work as needing the income for living expenses (38%). However, other reasons included using the income for fun money, access to health care benefits, delaying Social Security benefit, and being mentally stimulated.

Related: Retiree regrets: How employers can get the next generation to retire better

Every individual’s retirement plan is personal. As younger generations express their expectations to take a phased retirement approach, employers need to pay attention to this and understand what that might mean. It’s becoming increasingly important that savers have access to education, advice and more personalized investment and retirement income solutions that help support a retirement that aligns with their individual desires and needs.

Nate Schelhaas is a senior vice president, actuary, and head of the Business Owner Segment in Benefits and Protection with Principal Financial Group. He is responsible for the management of the New Business, Underwriting Product Development and Actuarial Teams.  He also leads the Data and Analytics team for the Benefits and Protection segment.