Are you a government or corporate employee who’s concerned about layoffs? If so, you’re not alone. As of March 2025, the United States has experienced significant layoffs across both federal and private sectors. In February alone, layoffs surged to 172,017, the highest monthly total since the onset of the COVID-19 pandemic. Whether you are a government employee or not, worrying about a drop in income or retirement benefits could lead to financial stress and how that change could impact your retirement.
In this blog, I’ll share what I believe is the biggest mistake investors make—a mistake that can magnify financial stress. I’ll also share five questions you should ask to reduce financial stress if you’re concerned about layoffs or any change that could result in a drop in income or benefits.
Question #1: How many months of spending do you have access to (without a penalty) if your income stops tomorrow?
During the COVID crisis, I had countless conversations with clients who had lost their jobs or who were worried about a significant drop in income. Answering this question—how many months of your living expenses could you access without a penalty—felt so simple yet so effective in lowering financial stress due to a layoff or any reason someone might have a drop in income. Why?
Because so many of our clients said they could likely find new work before their reserves ran out, our clients who were not yet retirement age often had 12-24 months or longer in funds they could access without a penalty.
Before we get into an example showing how to answer this question for yourself, let’s review what types of accounts could be accessed without a penalty and the accounts where penalties could apply if you access funds before retirement age, which is typically 59.5.
- Checking, savings, and money market accounts at your bank are accounts that you can access without a penalty.
- Taxable investment like stocks, bonds, mutual funds, and ETFs held in a non-qualified brokerage account can also be accessed penalty free. While there might not be any penalty to access funds before age 59.5, you might owe taxes if there are gains in your account.
- Some Roth IRA money, such as principal contributions, can be accessed without a penalty before age 59.5, so many investors consider their Roth IRA principal a worst-case scenario reserve since they could access it penalty-free.
- Sometimes, cash-value life insurance can be accessed without a penalty if you have an insurance policy.
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- Typically, tax-deferred retirement plans like traditional IRA accounts, 401k, and 403b accounts cannot be accessed before age 59.5 without a 10% penalty. There are some exceptions, and we will cover a couple of them later. Obviously, you want to avoid a penalty whenever you can, and ideally, you would not have to access money from any account that would impose a penalty during a layoff.
Now, let’s work through an example to see how many months of spending this fictional family has access to without a penalty.
Let’s assume Suzanne’s family spends $10,000 / month on all living expenses. Let’s also assume Suzanne and her husband, John, have $30,000, or three months of expenses, in their checking and savings accounts and another $60,000 in a taxable brokerage account that they could access in an emergency—that’s a total of nine months of living expenses without any income.
Additionally, let’s assume that Suzanne and her husband funded $30,000 in contributions into their Roth IRA accounts, where they can access their principal contributions tax-free and penalty-free before age 59.5.
In total, they have access to $120,000, which would provide 12 months of living expenses if Suzanne was laid off from her job at the VA in Minneapolis. However, her husband John brings home $6,000 / per month, so Suzanne and John currently have access to 24 months of income ($120,000 / $6000 / month) if Suzanne loses her job.
Knowing how many months of reserves you have could potentially empower financial decisions and lower stress in times of uncertainty.
Before we go to the next question – let’s review a few of the exceptions and nuances that could allow you to access funds in retirement accounts:
- Most retirement plans—401k, 403b, traditional IRAs, Simple IRAs, and SEP IRAs—have a 59.5 rule, and distributions before that date would be subject to a 10% penalty or loan costs and fees from plans that allow loans. This is not ideal.
- However, many 401k plans allow participants to access funds without a penalty for a hardship withdrawal. Review your plan document for details, or have your advisor read through the fine print for you. Similarly, the Government TSP or thrift savings plan has a 10% penalty for withdrawals before age 59.5, with some exceptions that can be found in the TSP Tax Booklet. Some include no penalties if you meet the rule of 55 and have separated from service.
- Another way to get income out of 401k, 403b, and other retirement accounts without a penalty is to complete a tax-free rollover of your company retirement plan into a traditional IRA. Once the funds are in a Traditional IRA, you can take income without a penalty under regulation 72(t). But, just be careful to work with your advisor and your accountant to discuss how these distributions could impact your future since IRS reg 72(t) has strict requirements that you must take equal and substantial payments for at least 5 years or until age 59 1/2 – whatever is longer… and the amount must fall within the IRS guidelines posted on the IRS website.
Question #2: Will my financial future be secure if I’m laid off or take early retirement?
To explore this question, many financial advisors rely on financial planning software that can calculate a probability of success using your specific lifestyle spending, your investment and retirement assets, which might include a TSP or 401k retirement plan, major purchases, and your income sources—including paychecks from your employer and pension payments, and more.
The software can use historical data from your current investment mix to run simulations and calculate a historical success rate. It can then explore alternative investment and financial strategies to improve your probability of success.
While historical data does not guarantee future results, a probability of success greater than 70% might provide an investor with confidence that they can survive a layoff compared to a financial plan with a probability of success of 7%.
The picture shows a hypothetical result for a 50-year-old who was planning on retiring at 62 and gets laid off without returning to work. Their probability in this hypothetical drops significantly from 97% to 40% – showing that most of the time, their plan runs out of financial fuel before the end of the plan.
However, the probability isn’t too far from 50%, and there is hope their plan could work if they had somewhat favorable investment returns, worked part-time, or worked a few more years in a different position. In those cases, their probability could jump to a much higher number.
Question #3: What do you do once you know your financial plan’s probability of success?
What you do after knowing your plan’s probability of success is often tied to the strength of your plan. If the probability is high, and you have a pending layoff or early retirement modeled in your plan, many people feel confident in their future and less stressed about a potential layoff or pressure to take the first job offer they receive. Having less financial pressure can give more time to make the right career decision.
On the other hand, if your probability of success is lower than what you need to feel secure in your future, as in the example above, where it landed at 40%, you might want to consider adjusting your plan’s strategy or be prepared to make adjustments later in life.
I like to look at a low probability, like a decision to pull over and fill up the fuel tank in our vehicle when my low fuel light turns on. I basically have two decisions to make:
- Do I need to add more fuel to our vehicle before I get to my destination?
- Should I drive carefully to try and improve my gas mileage to make sure I make it to my destination?
Similarly, an investor who has a high probability of success in their plan (or what appears to be a full financial fuel tank at retirement) with a job layoff or early retirement modeled in their plan might decide just to continue the course and retire or have peace of mind that work might not be needed. In other words, working to put more gas in the tank might be optional. And some people continue to work because they find purpose or meaning in their work.
On the other hand, if an investor has a lower probability of success after running a scenario in their plan, and it appears they could run out of money, they can work with their advisor to explore options to improve their retirement fueling strategy or probability of success. Options are as follows:
- Add more fuel. In other words, get another job, part-time or full-time, and protect your accounts from early withdrawals
- Improve your miles per gallon. In other words, tighten the belt with your plan’s spending, which is similar to driving carefully when you’re low on fuel. This might not be ideal unless you have some items in your budget that you are comfortable adjusting.
- Target higher investment returns. If you have a heavy amount invested in cash or bonds, increasing your stock holdings in your portfolio could potentially increase your probability of success by giving you greater potential returns to fill up your investment and retirement accounts. However, more risk could also lead to greater volatility in your portfolio and potential for losses.
- Some combination of the above
To recap: Knowing your probability of success can impact how confident you are in the future. If your probability is lower than you want it to be, celebrate that you know where you stand financially because you are in a position to make decisions with confidence.
Ignoring your financial plan’s probability of success in a time of uncertainty is like driving a vehicle that has duct tape over the fuel gauge. You might be worrying more than you need to about running out of fuel, or you could be at risk of not knowing it.
Question #4: If I lose or quit my job, where should I withdraw money from (tax-deferred retirement, TSP/401k, taxable accounts, Roth IRA, etc.)?
Navigating this decision requires analyzing your tax bracket in the year of a layoff compared to the estimated brackets you will have in the future. Generally, if your financial planning or tax planning software projects a higher future tax bracket, it could make sense to pay the tax today and take money out of tax-deferred retirement accounts.
However, it’s also complicated because sometimes, taking income in a low-income year prevents you from receiving certain tax credits or reduced health insurance.
On the other hand, if you’re expected to be in a lower tax bracket in the future, you might benefit from letting your tax-deferred funds accumulate and take money from a taxable account or a Roth IRA account.
I suggest rolling up your sleeves and getting your financial plan and tax projections up-to-date so you can feel confident with your decision or your advisor’s recommendation for taking income.
Question #5: What should I do with my company retirement plan if and when I get laid off, retire, or quit my job?
The answer to this question depends. Generally, there are four options.
- Leave it where it is
- Cash it out (typically not recommended)
- Rollover the account to a traditional or rollover IRA
- Roll it over into your next company retirement plan.
You could also combine some of these options. Just keep in mind that other plans may not have Roth conversion opportunities, which could minimize your lifetime tax bill. Some plans might have more restrictions on when and how you can access your money, or they may limit your beneficiary options.
Not having answers to these five questions could leave you feeling financially stressed or put you in a position to miss out on wealth-building or tax-minimization opportunities.
So, if you are:
- Worried about a potential layoff
- Interested in taking a lower-stress job for less pay but worried about the impact on your financial future
- Thinking it would be nice to take early retirement if a severance package is offered
Consider taking these three steps:
- Create a financial plan
- Review your plan’s probability of success with your current position and compare that with a scenario where you might have a lower income (e.g., layoff, retirement, etc.)
- Enjoy the confidence of having a financial plan to empower decisions about your future
If you need help creating a financial plan or planning for a major work-life transition, such as retirement or a layoff, we’re just a click away.