Reinventing retirement

Leisure-work combo has fans, may get boost if laws change

Older Americans are reinventing retirement. As they do, they're prompting federal regulators and human resources departments to change the rules.

JIM MAHONEY/DMN

'More people are trying some combination of retirement and work,' says human resources consultant Barbara O'Neal.

"Retirement used to be 'all or nothing' – you were either retired or employed," says Dallas human resources consultant Barbara O'Neal. Now, "more people are trying some combination of retirement and work."

Many older workers don't want to work as many hours, but they still enjoy the challenge or need the income. So they're retiring in steps, collecting their pension from one company while getting a part-time or consulting job at another.

Ms. O'Neal calls it "retirement but with training wheels."

However, because of tax and pension laws, scaling back usually requires changing employers, even though many older workers would prefer to stay at the employer they know rather than re-enter the labor market.

"It's always easier to keep a job than to get a job," points out AARP senior policy adviser Sara Rix.

The idea of phased retirement is popular with employees, says Valerie Paganelli, a senior consultant with Watson Wyatt.

A survey by the human resources consulting company found that two-thirds of older workers wanted to scale back their hours before completely retiring. One-third also said they would postpone their full retirement if their employers offered a phased retirement option.

Federal rules changes could encourage that.

Human resources professionals call a proposal by the Internal Revenue Service a good first step to encouraging phased retirement.

Under the rule, workers 59 ½ or older would be able to cut back hours and live off a combination of a reduced salary and a partial pension from the same employer.

Workers who scaled back to 20 hours a week, for example, could tap half of their early-retirement pension benefits.

When the employees completely retired and began collecting their ultimate pension benefits, they wouldn't be penalized for the lower earnings of their last working years.

The programs would be voluntary for both employers and employees and cover traditional, defined-benefit pensions.

"Defined-contribution plans are more conducive to phased retirement, since employees can already withdraw funds at 59½," says Ms. Paganelli of Watson Wyatt. Defined-contribution plans generally offer a lump sum at retirement, compared with defined-benefit plans' monthly checks for life.

Human resources specialists praised the intent of the IRS regulation.

"It provides some clarity and may prompt some employers to act," says Mary Huttlinger, manager of tax and benefits policy for the Society for Human Resource Management.

Procter & Gamble Co. and Eli Lilly & Co. have acted without the IRS. Their innovative approach highlights the need for retired employees' talents.

To get around the rules, the companies helped create an independently owned business that recruits and manages recently retired workers.

YourEncore matches its 500 retirees with short-term assignments at P&G, Eli Lilly and several other companies.

Most are engineers and scientists who retired in the last few years from long careers in research and development, says YourEncore executive vice president Mike Kostrzewa.

"They're a robust group," he says.

The retirees work for YourEncore and are paid based on their salary upon retirement.

Tom Jeffers, a biologist who retired from Eli Lilly at 60, recently returned as a YourEncore employee to work on a special project for about a month.

"It's a great way to keep your mind engaged and your skills up to date," he says. "And when it's over, I get to resume my retirement."

Human resources experts say the federal government should be doing more to encourage phased retirement.

Ms. Huttlinger and others question whether the IRS regulation's paperwork requirements would prove too burdensome to employers and discourage participation.

Critics of the IRS rule also argue that early retirees as young as 55 should be eligible for partial pension benefits, a move they say may require congressional action.

U.S. Rep. Sam Johnson, R-Plano, a member of the House Ways and Means Committee and the Education and Workforce Committee, says the best way to give "maximum flexibility" to employers interested in offering phased retirement is through a congressional statute.

"Legalizing phased retirement should be fairly simple," he says.

Eugene Steuerle, a senior fellow at the Urban Institute, expects employers to begin offering phased retirement once Congress acts.

The economy can't afford outdated tax and pension rules that were designed to get rid of older workers and replace them with younger ones, he says.

"Older adults represent our largest untapped pool of human talent," Mr. Steuerle says. "They can be a part of the solution."