Phased retirement holds its share of mysteries, and is often misunderstood.
Given the shortage of workers in many industries and the aging population, many employers see phased retirement as a win-win situation. It allows society to benefit from your skills and experience, while providing you with more freedom.
Phased retirement can take different forms depending on your situation: reducing your working hours, combining employment income with retirement income, using personal savings or taking advantage of measures provided through a retirement plan. It is therefore important to review the options available to you with your employer and the appropriate organizations.
Here are the main things to consider in order to make an enlightened decision.
What is phased retirement?
When a person wants to gradually reduce their working hours before fully retiring, different options may be available. Phased retirement is not a single measure: depending on the applicable rules, it can involve combining employment income with a retirement pension, personal savings or benefits from a retirement plan.
It is not accurate to say that Québec Pension Plan (QPP) benefits are automatically available at age 55. You can generally start receiving your QPP retirement pension at age 60. At age 65, you receive 100% of the pension calculated according to the applicable rules. If you start receiving it before age 65, it will be reduced for life, while delaying it beyond age 65, up to age 72, will result in a higher pension.
Starting at age 55, certain employees can enter into an agreement with their employer that allows them to reduce their working hours while continuing to contribute to the QPP as though their salary had not been reduced. This measure is separate from receiving a QPP retirement pension.
According to Retraite Québec, certain phased-retirement measures allow, under certain conditions, people to work part-time or even full-time while receiving up to 60% of their retirement pension. This possibility depends, among other things, on the type of retirement plan and the applicable conditions. It does not mean that everyone aged 55 and over can automatically receive 60% of their pension while working.
As each situation varies, it is highly recommended to meet with a financial planner to make sure you’re coming out on top. A personalized analysis can help assess the impact of reducing your working hours, deciding when to start receiving QPP benefits and determining how to use your various sources of retirement income.
Retraite Québec’s website offers tools to help you plan for retirement and compare different retirement and phased-retirement scenarios.
To help you prepare, read up on the 3 mistakes to avoid when planning your retirement.
In the same vein, your property could finance your retirement. To learn out more, read up on retirement planification and reverse mortgage.
How to become eligible
As mentioned above, there is no single eligibility rule for phased retirement. Requirements vary depending on the measure or retirement plan involved.
For example, to enter into an agreement that allows you to work fewer hours while continuing to contribute to the QPP as though your salary had not been reduced, you must be an employee aged 55 or older but under age 72. Your employer must agree to the arrangement. Self-employed workers are not eligible for this measure, except in certain specific situations, such as the owner of an incorporated business who contributes to the QPP as an employee.
An agreement with the employer is required for these measures. However, the employer is not required to agree to a reduction in working hours or to the payment of a phased-retirement benefit and may establish certain conditions. Your schedule, duties and compensation may therefore need to be adjusted accordingly.
It goes without saying that some businesses and industries are better suited for this type of arrangement than others.
The possibility of reducing your working hours depends, among other things, on your employer’s needs, your position and the provisions of the applicable retirement plan.
Getting mentally prepared
Are you better off working half-days five days a week? Would you rather have shorter three-day work weeks? Are you considering projects that would require longer vacation periods?
No matter how you decide to arrange your schedule, it’s up to you to find a solution that best suits your needs, as well as those of your employer. There is no specific average number of working hours that defines phased retirement. Your schedule may vary depending on the agreement with your employer and your individual situation.
You also have to keep in mind that some of your expenses may be reduced. For example, if you’re working a three-day work week, the expenses brought on by your job (food, transportation) should normally be reduced as well.
It is important to consider how a reduction in income could affect your budget and your various sources of retirement income. A retirement income plan can help determine when and how to use employment income, QPP benefits, retirement plans and personal savings.
Contact your Multi-Prets broker to find all the options available to you.
Key takeaways
- When a person wants to gradually withdraw from the workforce, phased retirement can be one of their options. The terms and conditions vary depending on their situation, employer and retirement plan.
- Certain phased-retirement measures allow, under certain conditions, people to work part-time or even full-time while receiving a retirement benefit of up to 60% of their pension, depending on the retirement plan involved.
- When the measure requires an agreement with the employer, the employer must agree to the terms of the phased retirement.