Suze Orman’s 8-Month Test Before Using Retirement Money After a Layoff

Suze Orman has a firm guideline for anyone facing a job loss and eyeing a 401(k) statement: “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?” She repeats that advice in an episode of her Women & Money podcast, Classic Suze School: Financial Solutions if You’ve Lost Your Job.

Quick Read

• Orman says you should only tap a retirement account after job loss if the after-tax amount can cover at least eight months of expenses.

• Taxes and the 10% early-withdrawal penalty can reduce a $24,000 401(k) balance to about $16,320, enough for roughly four months rather than six.

• Before touching retirement savings, use unemployment benefits, emergency cash, and taxable investments; a direct IRA rollover can also help avoid penalties.

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Her warning is simple: if you drain a small retirement account too soon, you may still fall short on expenses and end up in bankruptcy with nothing left. In bankruptcy, retirement plans are generally protected from creditors, but money already withdrawn and spent is gone.

Taxes Make Her Rule Even Tougher

Orman argues that the timing matters because finding a new job can take a long time. “If you do lose your job, it could easily take you eight months to a year to get another one,” she says. In her view, if an account cannot bridge that gap, a withdrawal only postpones the problem while using up the asset that might have remained intact.

Current labor-market conditions reinforce that caution. Unemployment stood at 4.2%, while job openings slipped to 7.1 million from 7,585 thousand earlier in the year, suggesting it may take longer for some laid-off workers to land another position.

Consider a 45-year-old with $24,000 in a 401(k) and $4,000 in essential monthly bills. On paper, that balance covers six months, which still falls short of Orman’s benchmark.

The amount shrinks further once taxes and penalties are factored in. Cash distributions from a plan generally require 20% withholding on the taxable portion. In this example, that means $4,800 is withheld immediately. The withdrawal is also taxed as ordinary income, and before age 59½, federal law adds a 10% early-withdrawal tax on the taxable amount in addition to regular income tax.

Using a 22% federal tax bracket as an example, the $24,000 would drop to about $16,320 after taxes and the penalty. That would cover only about four months of expenses, before any state tax is considered, leaving the worker short of Orman’s eight-month standard.

As Orman puts it, “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.”

How the Eight-Month Test Works

Whether a withdrawal makes sense depends on how many months of expenses remain after taxes and penalties. With the same $4,000 in monthly bills and the same tax assumptions, a $60,000 balance would net about $40,800, which would cover 10.2 months. That clears her eight-month threshold with room to spare.

There are a couple of exceptions that improve the math. A 401(k) payout taken after leaving a job, or after the year you turn 55, avoids the extra 10% tax. IRA withdrawals used to pay health insurance costs during unemployment also avoid that penalty. In both cases, ordinary income tax still applies.

Think Before Requesting a Distribution

Orman’s bottom line is direct: “You have got to take the steps today to protect your tomorrows in case it happens.”

Her advice is to touch retirement savings only if the after-tax value can cover at least eight months of bills.

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