You Just Got Downsized. Could This Be The Time To Revisit Retirement?

What if losing your job isn’t the end of your career—but the beginning of your retirement? 

For someone in their late 50s or 60s, a company downsizing, merger, restructuring or unexpected layoff can be devastating. After decades of working, suddenly the paycheck stops, your benefits may change, and you are faced with a decision you never expected to make. 

Your first thought may be, “I need to find another job.” 

But before you immediately start sending out résumés, there is another question you should ask: “Do I actually need to go back to work?” 

You may be closer to retirement than you think. 

A layoff can force you to take a hard look at the financial resources you have accumulated over your working career. Your 401(k), IRA, pension, investment accounts, savings, Social Security benefits and other assets may have been building for decades. You may also receive severance pay, unused vacation pay or qualify for unemployment benefits. When all of those resources are put together, the picture can look very different from what it looked like when you were receiving a regular paycheck. 

The time to find out isn’t after you have spent six months worrying about your next job. The time to find out is now. 

Start by taking a complete inventory of your retirement assets. Look at every 401(k), IRA, investment account, bank account and other source of savings. But don’t stop at the account balances. The more important question is: How much retirement income can these assets potentially provide, and for how long? 

A $1 million 401(k) does not automatically mean you can retire. At the same time, a person with $1 million in retirement assets, a pension, Social Security, a paid-off home and modest expenses may have a very different financial situation from someone with the same $1 million who still has a large mortgage and substantial debt. 

That’s why the number on your 401(k) statement is only the beginning. 

Next, look at your debt. Mortgage payments, home-equity loans, credit cards, auto loans and other obligations can dramatically affect the amount of income you need every year. If your paycheck disappears, you need to know exactly how much money has to come in each month to maintain your lifestyle. This is also the time to determine whether paying off certain debt makes sense or whether the debt can be incorporated into your retirement-income strategy. 

Then look at your pension. If you have one, don’t assume the decision is simply whether to take it or not. Depending on the plan, you may have different starting dates and payout options, including survivor benefits or other alternatives. Starting a pension earlier may provide income sooner, but the amount of income may be different from what you would receive by waiting. A pension decision should be evaluated as part of your entire retirement plan—not by itself. 

Your severance package also matters. Depending on your employer and circumstances, you may receive several weeks or months of severance, payment for unused vacation or other benefits. You may also qualify for unemployment compensation. These resources could potentially provide a bridge between your final paycheck and the beginning of your retirement income. 

And that bridge could be extremely important. 

It may give you time to determine whether you need to claim Social Security immediately or whether you can use other resources and wait. 

Social Security can generally begin as early as age 62, but claiming before full retirement age permanently reduces the monthly benefit. For people born in 1960 or later, full retirement age is 67. On the other hand, delaying Social Security beyond full retirement age can increase the monthly benefit through delayed retirement credits until age 70. [1] 

That creates an important question following a layoff: 

Should you start Social Security because your paycheck stopped—or can you afford to wait? 

There is no single answer for everyone. Your age, marital status, income needs, investments, pension, health circumstances and tax situation all matter. But claiming Social Security simply because you lost your job may not always be the only option. 

There is another issue that can completely change the retirement calculation: health insurance. 

If you are under 65 when you lose your job, you may be able to continue your employer’s health coverage through COBRA. You may also qualify for a Special Enrollment Period to purchase coverage through the Health Insurance Marketplace after losing employer coverage. [2] [3] 

For someone who is 61, 62, 63 or 64, those health-insurance costs can become one of the largest expenses between retirement and Medicare eligibility. 

If you are approaching 65, Medicare becomes another critical part of the plan. Medicare explains that people who are covered through active employer coverage may have a Special Enrollment Period when that employment or coverage ends. Importantly, choosing COBRA does not necessarily extend the same Medicare enrollment period. [4] 

In other words, health insurance cannot be an afterthought when you retire. 

It needs to be part of the retirement calculation before you make the decision. 

For people who lose their job in their mid-to-late 50s, there is another provision that deserves attention: the Rule of 55. 

Under federal tax rules, the 10% additional tax that generally applies to certain retirement-plan distributions before age 59½ may not apply when an employee separates from service during or after the calendar year in which the employee reaches age 55, provided the distribution meets the applicable requirements. [5] 

That can be particularly important if you are laid off at age 55, 56, 57 or later and need access to money in your employer’s retirement plan before reaching 59½. 

But there is a major reason to slow down before rolling your 401(k) into an IRA: the Rule of 55 applies differently to employer plans and IRAs. Moving money without first understanding the consequences could affect your available strategy. 

For someone who needs income before age 59½, Section 72(t) may also be relevant. Under the tax rules, certain substantially equal periodic payments can qualify for an exception to the 10% additional tax on early distributions. However, strict rules apply to these payments, and changing the arrangement prematurely can result in additional taxes. [6] 

These are the kinds of decisions where timing matters. 

One financial decision can affect another. 

Taking Social Security can affect your income-tax picture. Taking money from a 401(k) can affect your taxable income. Your income can affect certain Medicare-related costs. A pension election can affect lifetime income. Paying off a mortgage can change your cash flow. Rolling over a 401(k) can potentially affect your ability to use certain retirement-plan exceptions. 

That’s why a layoff shouldn’t automatically lead to a frantic job search. 

It should lead to a financial inventory. 

Sit down and put everything on the table: your 401(k)s, IRAs, investments, pension, Social Security estimates, savings, debt, mortgage, monthly expenses, severance, unemployment benefits and health-insurance costs. Then run the numbers. 

Could your assets provide enough income to retire? 

If the answer is no, you have valuable information. You may decide to find another job, work part-time or postpone retirement. 

But what if the answer is yes? 

What if the job you just lost was actually the last job you needed? 

That is the question many people never stop to ask. 

A layoff is never something most people plan for. But if it happens later in your career, it can become a financial turning point. Instead of immediately asking, “Where can I find another job?”, it may be worth asking, “Do I need another job?” 

Don’t guess. Don’t panic. And don’t automatically assume you need another paycheck. 

Take inventory. Understand your options. Calculate your income needs. Review your taxes, investments, pension, Social Security and health-care costs. And before you make an irreversible decision, sit down with a qualified financial advisor who can help you put all of the pieces together. 

Because the most important question after a downsizing may not be: 

“Where am I going to work next?” but “Am I already ready to retire?”

Footnotes and Sources 

[1] Social Security Administration — Retirement Benefits. Social Security retirement benefits can generally begin at age 62. Benefits are reduced when claimed before full retirement age, while delaying benefits beyond full retirement age can increase benefits through delayed retirement credits until age 70.
Social Security Administration — Retirement Benefits 

[2] HealthCare.gov — Special Enrollment Periods. Losing job-based health coverage may qualify an individual for a Special Enrollment Period to obtain Marketplace coverage.
HealthCare.gov — Special Enrollment Periods 

[3] U.S. Department of Labor — COBRA Continuation Coverage. COBRA may allow eligible employees and their families to continue employer-sponsored group health coverage after certain qualifying events, including loss of employment.
U.S. Department of Labor — COBRA Continuation Coverage 

[4] Medicare.gov — When Can I Sign Up for Medicare? Medicare explains the enrollment rules that may apply when employer coverage ends and the relationship between employer coverage, COBRA and Medicare enrollment.
Medicare.gov — When Can I Sign Up for Medicare? 

[5] Internal Revenue Service — Exceptions to the 10% Additional Tax on Early Distributions. The IRS identifies an exception that may apply to qualifying distributions from an employer retirement plan following separation from service during or after the calendar year in which an employee reaches age 55.
IRS — Exceptions to Tax on Early Distributions 

[6] Internal Revenue Service — Substantially Equal Periodic Payments. Certain substantially equal periodic payments may qualify for an exception to the 10% additional tax on early retirement-plan distributions, subject to specific requirements.
IRS — Substantially Equal Periodic Payments