Should You Retire After Losing Your Job? Avoid Mistakes

The costliest mistake after a layoff: locking in a bad plan

The costliest mistake after a layoff isn’t the layoff. It’s locking in a bad plan, fast. I’ve watched smart people make an emotional, permanent retirement decision in the first 60-90 days because the paycheck stopped, markets looked jumpy, and COBRA quotes made their eyes water. I get it. Stress compresses time. But that first quarter after a job loss is exactly when permanent moves, cashing out a 401(k), claiming Social Security at 62, pulling a big IRA distribution, can drain decades of wealth in a hurry.

Here’s my take, and I’ll admit I’m simplifying to make the point: you need two things before you say “I’m out” and call it retirement, (1) a short-term cash runway that buys you 6-12 months of breathing room, and (2) a long-term retirement math check that holds up even if markets act badly again. Without those, you’re gambling your future on this month’s emotions.

Context matters in 2025. Markets and inflation have been choppy since 2021. We had U.S. CPI peak at 9.1% year-over-year in June 2022 (BLS), then cool, then wobble again with sticky services inflation. Equities? The S&P 500 lost about 18% on a total return basis in 2022, then bounced roughly 26% in 2023 (S&P Dow Jones Indices). That whiplash is exactly why sequence risk, the order of your returns, can wreck an early retirement that starts at the wrong moment. Retire into a drawdown, sell shares to fund living costs, and you lock in losses. Retire into a rebound and you look like a genius. Same person, different sequence.

Health insurance is another landmine. COBRA typically lasts 18 months and it’s pricier than most expect. The more important point in 2025: ACA premium subsidies remain enhanced through the end of this year under the Inflation Reduction Act. Your income choices right now determine whether you qualify for meaningful subsidies, or miss them by a hair. And at 65, Medicare premiums (IRMAA) are based on your income from two years prior, so a big Roth conversion or a one-time cash-out this year can raise your Medicare bill in 2027. Not fun.

Bottom line: The fastest wealth drain after a layoff is making a permanent decision in the first 60-90 days. Use a temporary plan to buy time for a sober one.

• Avoid the permanent traps in the first 60-90 days: Claiming Social Security at 62 can cut your benefit by up to ~30% versus your full retirement age (SSA). Cashing out a 401(k) before 59½ usually triggers a 10% penalty plus ordinary income tax, and if you don’t do a direct rollover, plan administrators typically withhold 20% upfront.
• Build a temporary runway: 6-12 months of cash from safer sources, severance timing, unemployment benefits, a HELOC you set up while still employed, partial Roth conversions within low brackets, or a small brokerage draw. The point is to avoid selling stocks at lousy prices or triggering avoidable taxes.
• Respect sequence risk: Since 2021 we’ve seen both sharp declines (2022) and strong rebounds (2023). If you retire during a dip and sell to fund spending, your portfolio may not recover fully. A “bridge budget” for year one can materially improve the odds.
• Think in tax years, not weeks: Your calls today ripple through decades, affecting lifetime tax brackets, ACA subsidies in 2025, and future Medicare premiums. The SECURE 2.0 rules (RMD age 73 for many) changed the timing game; coordinate withdrawals, Roth moves, and capital gains with that calendar.

What you’ll get from this piece: a simple framework to set a 90-day cash runway, a checklist to avoid the irreversible stuff, and a clean way to test whether “retire now” pencils out after taxes and insurance. I’ve seen people save six figures, literally, by taking a breath and running the numbers. And yeah, I know, I’m a markets person, I tend to over-weigh sequence risk. But that bias comes from scars. The call you make this quarter doesn’t just affect this winter’s budget. It shapes your tax bill and portfolio longevity for the next 20-30 years.

One last thing I almost forgot: if the jargon starts creeping in (sequence risk, IRMAA), I’ll keep it plain. Market timing hurts most when you don’t realize you’re doing it. A short runway plan helps you stop doing it without meaning to.

First 90 days: cash, health coverage, and keeping penalties away

Un-glamorous? Totally. But this is where most of the avoidable damage happens. We’re going to buy you time, keep the IRS off your back, and stop any health-insurance landmines. Short, practical moves. And yeah, I’ll call out where the rules get weird so you can skip the gotchas.

1) Build a 6-12 month cash runway

• Trim spending now: pause big purchases, subscriptions, and “we’ll figure it out later” travel. Ask: do I need it, or do I want it? Answer: want can wait 90 days.
• Set a bill-pay lite budget: automate rent/mortgage, utilities, minimum debt payments, insurance, groceries, and meds. Keep it boring. I keep my own “runway” checking separate so lifestyle creep doesn’t sneak in.
• Park the runway in safe cash: high-yield savings and T-bills are still paying materially more than the 2010s. Even if rates wiggle, the point is stability for 6-12 months, not squeezing an extra 0.2% APY.

2) Severance: timing, taxes, and benefits

• Get the details in writing: payout timing (lump vs installments), PTO cashout, and the exact date benefits end. That last piece drives your COBRA vs ACA decision.
• Tax withholding check: severance is “supplemental wages.” The federal flat withholding rate is 22% for amounts up to $1 million (IRS supplemental wage rules, current in 2025). That’s often less than your real marginal rate if you were high income, so plan for a top-up next April. Over $1 million, the mandatory rate jumps to 37%.
• Bunching income: a big lump in December can push you into a higher bracket and affect credits and ACA subsidies. If your employer allows installment payments that spill into early next year, ask. Sometimes they say yes. Sometimes they say “no shot.” Still worth asking.

3) Unemployment insurance (UI): file immediately

• Don’t wait: many states have a waiting week; eligibility usually starts when you file, not when you were laid off.
• Taxes: UI is generally federally taxable. State taxes vary. No federal exclusion is in place for 2025, so opt for withholding if your state allows it, or set aside cash.
• Reality check on amounts: state formulas differ, but UI typically replaces a fraction of pay, often in the ~40%-50% range of prior earnings up to a cap. It won’t carry the whole load, pair it with that runway.

4) Health insurance: COBRA vs ACA marketplace

• COBRA: usually up to 18 months of continuation coverage. You pay the full employer premium plus up to a 2% admin fee. That can shock folks. For context, the KFF Employer Health Benefits Survey reported the average annual employer family premium at about $24,275 in 2024; COBRA means you’re on the hook for that (plus 2%). Single coverage averaged roughly the high-$8k range in 2024.
• ACA marketplace: the enhanced subsidies under the Inflation Reduction Act run through 2025. Enrollment for 2025 coverage opens Nov 1. If your 2025 income will be lower after the layoff, premiums can drop a lot after subsidies. Yes, estimating income feels like darts, still worth doing.
• Timing trick: you have a 60-day special enrollment window after losing coverage. Compare both paths: stay on COBRA for a month or two if you have ongoing care, then switch to ACA in January when the new plan year starts. Not elegant, but it can cut costs.

5) Retirement accounts: avoid penalties and unforced errors

• Do not cash out your 401(k): you’ll owe income tax, and if you’re under 59½, generally a 10% penalty too. Keep it in the plan or roll to an IRA. If you take a distribution check, the 60-day rollover clock is brutal, miss it and it’s taxable.
• Rule of 55: if you’re 55+ and separated from service this year, you may take penalty-free withdrawals from that employer’s 401(k). IRAs don’t qualify. Small detail, big dollars. I’ve seen this save folks mid-five figures.

Quick sequence to run in your first week

1. Email HR: severance schedule, PTO payout, benefits end date, COBRA packet.
2. File UI the same day. Elect withholding if allowed.
3. Set the “bill-pay lite” budget and move 6-12 months of core expenses into a separate high-yield account.
4. Price COBRA vs ACA with your new income estimate. Put a reminder for Nov 1 open enrollment.
5. Decide: keep 401(k) in-plan or roll to IRA. If any check is coming to you, mark the 60th day on your calendar in red.

Is this a lot? Yep. And I get oddly enthusiastic about this part because it’s pure defense, you can literally buy yourself better investing decisions later this year by not panicking now. If I’m getting too into the weeds, that’s fair; the tax bits can get fussy quickly. My north star is simple: protect liquidity, keep coverage, avoid avoidable taxes. Markets are noisy, cash rates are still decent, and you don’t need to “win” October. You need to be solvent and insured in March.

Can you actually retire now? Build the math, stress it, then decide

Can you actually retire now? Build the math, stress it, then decide.

Okay, this is where we translate your life into dollars, not theoretical, actual line items. Start simple. Two buckets: core vs nice-to-have. Core is the stuff you pay even if markets are cranky: mortgage or rent, groceries, utilities, insurance, transportation, baseline healthcare, minimum taxes. Nice-to-haves are travel, gifting, the ski pass you swear you’ll use 20 days, dining out, upgrades. If you’re spreadsheet-averse, paper and a pen is fine. I’m not judging; I still scratch numbers on envelopes sometimes.

• Core: housing, property taxes/HOA, food, utilities, car/transport, health insurance/premiums, prescriptions, basic clothing, income taxes, minimum debt payments.
• Nice-to-have: travel, hobbies, home projects, dining out, gifts, premium streaming everything, the boat that’s actually a floating expense line.

Health insurance before Medicare (65) deserves its own line. Price COBRA versus ACA. COBRA is typically 102% of the employer cost (sometimes up to 105%), which is a rude awakening when HR stops subsidizing. ACA can be cheaper or not, depending on your 2025 income estimate and subsidies. I’m oversimplifying here, but run both. Then add dental/vision and a cushion for surprises.

Now, map income sources. Get concrete:

• Social Security: Create or log in to my Social Security for your personalized estimate. Mechanics matter: claiming at 62 cuts your check by as much as ~30% if your Full Retirement Age (FRA) is 67; waiting past FRA bumps it ~8% per year up to age 70 (SSA rules, long-standing). Also, 2025 benefits carried a 3.2% COLA that was set last year (announced Oct 2024), so your baseline this year includes that lift.
• Pensions/annuities: Note single-life vs joint-and-survivor and whether there’s a COLA. If there’s a lump-sum option, interest rates this year still matter for the present value, high discount rates push lump sums lower.
• Rentals/side work: Use net, not gross. Vacancies and repairs are real. Part-time income helps bridge to 65/70 without locking in a low SS check.

Next, match expenses to resources. This is where withdrawal rates come in. The famous “4% rule” from the Trinity Study (1998) showed that a 4% initial withdrawal, adjusted for inflation, had high historical success over 30-year periods with a balanced 50/50 to 75/25 stock/bond mix. Helpful frame, not a promise. Markets don’t care about our rules. In practice, I like a flexible plan, spend a little less after a bad year, give yourself a raise after a good one. If rates on cash are ~4-5% and the 10-year Treasury hangs in the mid-4s (which we’ve seen a chunk of this year), that supports a bit more ballast on the fixed income side without abandoning equities.

Sequence-of-returns risk makes or breaks new retirees. Retiring into a down market can raise failure odds because you’re selling more shares when prices are low. Boring fix: keep 2-3 years of core expenses in cash and short bonds. That “buffer” lets you avoid panic selling after a -20% year. Yes, it drags on returns. It also prevents stomach ulcers. Pick your poison.

Taxes aren’t the fun part, but they pay the bills too. Under SECURE 2.0 (effective 2023), Required Minimum Distributions (RMDs) start at age 73 for many. That means your 60s can be prime years for strategic Roth conversions or simply living off taxable/cash while delaying SS to boost the guaranteed check. Small moves now can lower lifetime taxes later. And if you have a pension plus RMDs, watch IRMAA brackets for Medicare, income creep can mean higher Part B/D premiums. That’s me catching myself getting too technical, translation: mind the thresholds.

Now, stress test. Bad stuff doesn’t RSVP, it just shows up.

1. Bear market in the first 3 years: Haircut portfolio values by 20-30% early, freeze discretionary spend for a year, and draw only from your cash/bond bucket. See if the plan survives. If not, nudge spending down 5-10% and retry.
2. Higher medical costs: Use real numbers. Fidelity’s 2023 estimate put the average 65-year-old couple’s lifetime health costs (not including long-term care) at about $315,000. Build a line item for premiums, out-of-pocket, and a cushion.
3. Delayed home sale: If you plan to downsize, assume 12-24 months delay and a 5-7% price haircut plus selling costs. Can you carry both homes or the existing mortgage without selling at a bad time?
4. Long-term care event: Genworth’s 2023 Cost of Care Survey shows median annual costs around $116,800 for a private nursing home room, ~$104,000 for semi-private, ~$64,200 for assisted living, and roughly $68,000 for a home health aide. You don’t have to self-insure every penny, but you need a strategy.

Decision rule I use with clients (and my own family): if the core budget is covered by guaranteed income (SS + pension + annuity) and a conservative withdrawal from the portfolio, even after the bear/medical/LTC shocks, you can probably retire now without white-knuckling every CPI print. If you need 6-7% withdrawals to make the math work, that’s a no for me. Not never, just not yet.

Last thing: re-run the plan annually. Markets change, tax law drifts, goals evolve. Your “number” is not a tombstone; it’s a living, slightly messy spreadsheet. That’s fine. The goal isn’t perfection. It’s staying solvent, insured, and sleeping at night while the S&P has its mood swings.

Frequently Asked Questions

Q: How do I build a 6-12 month cash runway without blowing up my retirement plan?

A: Start with the least painful cash sources first. 1) Use severance, accrued PTO payouts, and unemployment benefits to cover the first few months. 2) Tap checking/savings and taxable brokerage next, sell higher-basis positions to keep taxes modest, and try to realize long-term gains over short-term where you can. If your income is temporarily low this year, some gains may fall into the 0% long-term capital gains bracket, nice little bonus. 3) If you’re 55+ and separated from service, consider the 401(k) “Rule of 55” to take penalty-free withdrawals from the 401(k) you just left (not IRAs). 4) Use Roth IRA contributions (your basis) if needed, those come out tax- and penalty-free; leave earnings intact to keep the tax shelter. 5) Keep an eye on ACA subsidies: marketplace premium help in 2025 is based on your household MAGI, so big IRA withdrawals can shrink or wipe out those subsidies. 6) Consider a HELOC as a backstop, low or no draw cost, gives flexibility without forced asset sales. What to avoid: large, taxable IRA distributions early in the year, cashing out the 401(k), or locking into Social Security at 62 purely out of panic. The goal is buying 6-12 months of time cheaply while you assess the long-term math.

Q: What’s the difference between COBRA, ACA marketplace coverage, and just waiting for Medicare?

A: COBRA: Same employer plan, typically up to 18 months, but you pay full freight (your share + employer share + 2% admin). It’s familiar but usually pricey. ACA marketplace: You can switch during your special enrollment window after job loss. Premiums in 2025 can be reduced by enhanced subsidies, depending on your MAGI and household size. Your income choices, how much you withdraw, when you do Roth conversions, directly affect those subsidies. Medicare: Kicks in at 65. If you’re 63 now, you need a bridge. Once on Medicare, premiums can rise with income due to IRMAA, and that’s based on a two-year tax lookback (your 2023 return affects 2025 premiums, and so on). Practical playbook: price COBRA vs ACA after estimating your 2025 MAGI, choose the cheaper net option for comparable coverage, and be mindful that high-income moves today can cost you in both ACA subsidies now and Medicare premiums later.

Q: Is it better to claim Social Security at 62 after losing my job, or should I bridge with savings?

A: In most cases, bridging with savings to delay benefits is the better lifetime math, benefits grow roughly 6%-8% per year you delay from 62 to 70, and the higher base protects you against longevity and inflation risk. Ways to bridge: use taxable cash first, part-time work, or small, tax-aware withdrawals; consider modest Roth conversions in low-income years (but don’t blow up ACA subsidies). When early claiming can make sense: poor health or short life expectancy, no liquid assets, or if delaying would force expensive debt. Also remember the earnings test before your Full Retirement Age, wages above the annual limit will temporarily reduce benefits if you claim early. Quick gut check: if you can fund the gap without selling a lot of stock in a down market or wrecking your ACA subsidies, delaying often wins.

Q: Should I worry about sequence-of-returns risk if I retire now in 2025?

A: Yeah, it’s a real thing, 2022’s drop, 2023’s rebound, and this year’s choppiness are exactly how sequence risk bites new retirees who have to sell shares at bad moments. Practical defenses: 1) Keep 12-24 months of living expenses in cash/short-term Treasuries so you’re not forced to sell stocks after a dip. 2) Use a guardrails withdrawal method, start around 3.5%-4% and adjust pay if your portfolio moves outside bands. 3) Hold a mix of quality bonds (Treasuries, short/intermediate) and consider a TIPS or Treasury ladder for the next 3-7 years of core spending. 4) Rebalance into weakness, sell bonds/cash after rallies to refill the stock bucket, not the other way around. 5) Sequence-aware taxes: harvest losses when available, be picky about realizing gains, and line up income so you don’t lose ACA subsidies. The idea is simple: buy time so you’re choosing when to sell, not forced to.

@article{should-you-retire-after-losing-your-job-avoid-mistakes,
    title   = {Should You Retire After Losing Your Job? Avoid Mistakes},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/retire-after-job-loss/}
}