Laid Off at 62 From an Employee-Owned Steel Mill: Should He Claim Social Security or Spend the 401(k) First?

The morning shift starts as usual. Then the gate is locked, and word spreads by phone that the mill is finished. That is roughly how the 253 workers at an employee-owned Illinois steel mill learned their jobs had ended, with their retirement savings still intact. Local agencies have arranged unemployment help, retraining, and introductions to other manufacturers. None of those services answers the question keeping one 62-year-old awake at night: should he start Social Security now, or live off his 401(k) until the monthly check is larger?

He is 62, earned $75,000 a year running equipment, and has roughly $420,000 in a 401(k). He has no retiree medical coverage and three years to wait until Medicare eligibility at 65. On forums where displaced steel and auto workers compare notes, the same dilemma keeps coming up: is a reduced check now the better choice, or is it smarter to draw down savings and let the benefit grow? No single answer fits every household, but there is a clear order for weighing the options.

The Permanent Cost of Claiming at 62

Claiming at 62 locks in a smaller check for life. For workers born in 1960 or later, full retirement age (FRA) is 67, so filing at 62 happens five years early. Filing at that point pays 70% of the FRA amount, a permanent 30% reduction. Delayed credits run at 8% per year only between FRA and age 70, which lifts the check to 124% of the FRA amount for someone whose FRA is 67.

If his full retirement age benefit would be about $2,400 a month, filing at 62 reduces that to roughly $1,680. The $720 monthly gap, close to $8,600 a year, never returns to his baseline. Each future cost-of-living adjustment (COLA) is applied to that smaller base, so the dollar shortfall widens with every increase.

Those increases have been sizable lately. The Social Security Administration announced a 3.6% COLA for 2027 on October 14, 2026, the largest since 2023 and up from 2.8% in 2026. The agency estimates the average retirement benefit will rise by about $75 a month. Because the adjustment is a percentage, a lower starting benefit gains fewer dollars from each raise than a full benefit would.

The 8% annual credit for waiting past FRA looks generous next to safe alternatives. The 10-year Treasury yield rose to 4.98% on November 10, 2026, briefly topping 5% during trading, while the 52-week Treasury bill yielded 4.38% as of November 9. Set against those benchmarks, spending 401(k) money so Social Security can grow amounts to buying a larger, inflation-adjusted lifetime income stream at a rate those products do not match. The catch is longevity. The credit only pays off relative to filing early if he lives into his early 80s.

The core tradeoff is straightforward to frame, even when it is hard to resolve. He can claim now for immediate cash flow and keep the 401(k) intact, or he can spend from the 401(k) as a bridge and let the future benefit grow to a permanently higher base.

Health Coverage Is the Hidden Anchor

Medicare begins at 65, which leaves a three-year coverage gap to fill. Private coverage through COBRA or an ACA marketplace plan can run from a few hundred dollars a month to well over a thousand, depending on income-based subsidies. This is where the two decisions collide. Claiming Social Security adds to reported income, which can shrink marketplace premium tax credits. That interaction has reversed many early-claim decisions once people run the actual numbers.

Illinois unemployment benefits can cover living costs while he weighs retraining or a lower-paying bridge job. Part-time work creates a separate problem. For 2026, the annual earnings limit for beneficiaries under FRA all year is $24,480, and Social Security withholds $1 for every $2 earned above it. That limit rises to $25,560 in 2027. For someone who also works part-time, the cap can wipe out much of an early check. Those withheld amounts come back later, because once he reaches FRA, Social Security recalculates the monthly benefit upward to restore them.

Illinois ranks 38th overall on tax competitiveness, but its retirement treatment is generous. Social Security benefits, 401(k) withdrawals, IRA distributions, and pensions are exempt from the state’s income tax, which otherwise applies a flat 4.95% rate. For someone living on a mix of those sources during the bridge years, that exemption matters. Once Medicare begins at 65, the standard Part B premium is $202.90 per month in 2026, up $17.90 from $185.00 in 2025.

At an employee-owned company, an Employee Stock Ownership Plan (ESOP) is a separate vehicle from a 401(k). The ESOP holds company stock and typically distributes on a schedule after separation, while a 401(k) is portable and can be rolled into an IRA right away. If he holds both, the ESOP payout timing, the concentrated stock exposure, and any associated tax treatment deserve a close look before he makes broader income decisions.

What to Weigh Before Filing

Two decisions carry more weight than everything else on the table.

1. Run the health insurance numbers first. Get an ACA marketplace quote at the lower reported income that comes from living on 401(k) withdrawals, then compare it against a quote that includes Social Security income. The subsidy difference often exceeds the monthly benefit itself, and that gap can swing the entire analysis.
2. Treat claiming age as the hardest decision to undo. A part-time job, a rollover, or a retraining program can all be adjusted later. A reduced benefit claimed at 62 follows him for 25 or 30 years, and it also shapes the survivor benefit available to a spouse.

The sequence is clear. Price the health coverage first, understand what early claiming permanently costs, and only then decide how hard the 401(k) needs to work as a bridge. Health, family longevity, and spouse benefits can each shift the math, so the arithmetic is worth reviewing with a financial planner who can see the full picture.

Editor’s note: The article now reflects the 3.6% Social Security COLA for 2027 announced October 14, 2026, in place of earlier projections, along with the 2027 earnings limit of $25,560 and a 10-year Treasury yield of 4.98% on November 10, 2026.

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