Suze Orman’s 8-Month Rule Before You Touch Your Retirement Account After a Job Loss
Losing your job and eyeing your 401(k) feels like a logical lifeline, but Suze Orman warns that cashing out at the wrong moment can leave you worse off than bankruptcy with nothing to show for it.
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Suze Orman has a hard rule for anyone holding a layoff notice in one hand and a 401(k) statement in the other: “If the money in the retirement account is going to last you under 8 months, you are not to take the money from there. Do you hear me?” The personal finance host gives this as standing advice in her Women & Money podcast episode Classic Suze School: Financial Solutions if You’ve Lost Your Job.
If you pull money from a small account too early, you can spend your retirement savings, still come up short, and end up in bankruptcy with nothing left. In bankruptcy, creditors generally can’t take your retirement plans. Any cash you’ve already taken out and spent is gone.
Orman Is Right, and Taxes Make Her Rule Even Stricter
The rule is sound. Her reasoning: “If you do lose your job, it could easily take you eight months to a year to get another one.” Eight months is a realistic job-search timeline. If the account can’t cover the whole gap, a withdrawal only delays the crisis. It also uses up the one asset that would have stayed intact.
Today’s job market supports her caution. Unemployment was 4.2% in September. Job openings fell to 7.1 million in August, down from 7,585 thousand in April. Fewer openings mean people who lose a job may take longer to find one.
Take a 45-year-old with $24,000 in a 401(k) and $4,000 a month in must-pay bills (example figures). On paper, that covers 6 months. That already falls short of Orman’s bar.
Taxes cut it further. Cash payments from the plan must withhold 20% of the taxable part. On this account, that’s $4,800 held back up front. The withdrawal also counts as ordinary income. Before age 59½, federal law adds a tax equal to 10% of the taxable amount, on top of regular income tax.
Assume a 22% federal tax bracket, for example. After that tax and the 10% penalty, the $24,000 shrinks to $16,320. That covers about 4 months of bills before any state tax, short of Orman’s bar.
A worker who thought they had six months has four if the search runs eight months; months five through eight come with no paycheck and no retirement account.
Orman puts it this way: “One of the biggest mistakes you can make is to use the money in a retirement account just to get by, use it all up, still not being able to pay your expenses, then end up having to claim bankruptcy and now you have nothing.”
Your After-Tax Months of Coverage Decide Whether Withdrawing Works
It depends on how many months the account covers after taxes and penalties. Keep the same $4,000 in monthly bills and the same tax assumptions, but raise the balance to $60,000. It nets $40,800, which covers 10.2 months. That passes the eight-month bar with room to spare.
Two exceptions improve the math. A 401(k) payout made after you leave a job, or after the year you turn 55, avoids the 10% additional tax. IRA withdrawals used to pay for medical insurance during a period of unemployment also avoid the 10% tax. Regular income tax still applies in both cases.
Run the Eight-Month Test Before You Request a Distribution
- Add up your must-pay bills. Include housing, utilities, insurance, food, and minimum debt payments. Cut everything optional right away. Every dollar you trim adds time to your cash.
- Figure out what the account is worth after tax. Subtract your federal bracket, your state rate, and the 10% penalty if you’re under 59½. Divide what’s left by your monthly bills. If the answer is under eight, leave the account alone.
- Use other money first. File for unemployment benefits right away. Then draw on emergency savings. Orman also points to a regular taxable investment account as money to use “even before you touch retirement accounts.”
- Check whether an exception applies. The age-55 rule and the unemployment health-insurance exception can remove the 10% penalty and change your result.
- Avoid cashing out when you leave your job. A direct rollover to an IRA avoids withholding and the 10% additional tax. Your options stay open.
- Rebuild a longer savings once you’re working again. Orman’s target is at least 8 to 12 months of expenses. That matches how long a job search can take.
Her bottom line: “You have got to take the steps today to protect your tomorrows in case it happens.”
Only touch your retirement account if its after-tax value can carry you through at least eight months of bills.
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Chris Lange is a financial and geopolitical writer with more than a decade of experience covering a myriad of topics. He has published thousands of articles for 24/7 Wall St., with past coverage focused heavily on stocks, IPOs, healthcare, defense, global affairs, and technology.
His work has been quoted, or referenced by a number of outlets including Business Insider, USA Today, Yahoo Finance, MSN, The Motley Fool, and many other publications. A graduate of Southwestern University, he studied business with a focus on investments and has previous experience in banking and startups.
When not reading or writing the news, he is following his passion for Lacrosse, playing chess, or building solar projects with his dad.
