Don't decide for at least 30 days. The right answer depends on three numbers: your retirement assets, the 5-year cost of private health insurance until Medicare at 65, and what your Social Security benefit looks like at 62, 67, and 70. For most people laid off at 60 with $1M+ saved, semi-retirement (consulting, part-time) for 3-5 years is structurally better than full retirement, primarily because of the healthcare cost gap.
A layoff at 60 is financially different from a layoff at 45 because the runway to recovery is short and the assets at risk (401(k), savings, home equity) are at their peak. The first decision isn't 'retire or not', it's 'what's the cost of this gap, and what's the most efficient way to bridge it?' That requires running three scenarios: full retirement now, semi-retirement (part-time or consulting), and full re-employment.
Healthcare is the dominant variable. From age 60 to 65, you must self-fund health insurance. COBRA from your former employer is available for 18 months but typically costs $1,500-$2,500/month for a couple. ACA marketplace plans range from $1,000-$2,500/month depending on plan and income. Income matters: ACA subsidies phase out as household income rises, so the lower your reportable income, the cheaper your coverage. This creates a planning opportunity, keeping income low (deferring IRA distributions, living off savings) can dramatically reduce healthcare cost during the bridge years.
Social Security analysis is the second variable. Claiming at 62 reduces your benefit permanently by ~30% vs claiming at full retirement age (67). Delaying to 70 increases the benefit by 8%/year past FRA. For most people laid off at 60, the optimal answer is to bridge to FRA or 70 from savings, not claim early. The break-even age for delaying typically falls in the late 70s/early 80s, given longer life expectancy in the Northern Suburbs, delay usually wins.
Severance package timing matters. Lump-sum severance is fully taxable in the year received. If your severance pushes you into a high tax bracket, consider whether the package can be paid over multiple years, used to fund a SEP-IRA if you have any self-employment income, or offset by accelerated charitable giving. Any company stock or deferred compensation in the severance has its own tax treatment that needs separate analysis.
Key facts
- COBRA: typically available 18 months at full premium cost, $1,500-$2,500/month for a couple
- ACA marketplace: subsidies phase out as income rises, keeping reportable income low reduces premium cost
- Medicare eligibility starts at 65, bridging from 60 to 65 is the major cost
- Social Security: claiming at 62 = 70% of FRA benefit (permanent reduction); claiming at 70 = 124% of FRA benefit
- 401(k) Rule of 55: if you separate from your employer in or after the year you turn 55, you can withdraw from THAT 401(k) penalty-free (doesn't apply to IRAs)
- Severance is taxable in year received, large packages can spike tax bracket
Should I take Social Security at 62 if I'm laid off?
Usually not. Claiming at 62 locks in a 30% permanent reduction vs claiming at FRA, and an even larger reduction vs claiming at 70. For most people with assets to bridge from, the math favors delaying. Exceptions: if you have serious health issues that significantly shorten life expectancy; if you have no other assets to bridge with and would otherwise need to take expensive 401(k) withdrawals at high tax rates; or if you have a much younger non-working spouse where survivor benefit calculations change the analysis. Run the analysis before claiming, early claiming is permanent and irrevocable after 12 months.
What is the Rule of 55?
The Rule of 55 lets you withdraw from your 401(k) without the 10% early withdrawal penalty if you separate from your employer in or after the calendar year you turn 55 (50 for public safety employees). Critical limitations: (1) it applies ONLY to the 401(k) of the employer you just left, not to IRAs or other employer 401(k)s; (2) once you roll the 401(k) to an IRA, you lose Rule of 55 access and would need to wait until 59½; (3) regular income tax still applies. For workers laid off in their late 50s or early 60s, this can provide flexible early access to retirement funds, but think carefully before rolling the 401(k) to an IRA, because the rollover eliminates this option permanently.
