Suze Orman’s 8-Month Test Before Withdrawing From Your Retirement Savings After Job Loss

Losing a job can make a 401(k) seem like the obvious backup plan, but Suze Orman says tapping retirement savings at the wrong time can leave you in even worse shape than bankruptcy.

Suze Orman has a firm rule for anyone facing a layoff and looking at a retirement account: “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.

Her warning is straightforward: if you withdraw from a modest account too soon, you may drain retirement savings, still fall short of what you need, and end up with nothing left in the end. In bankruptcy, retirement plans are generally protected from creditors. Money already withdrawn and spent is gone for good.

Why Orman Says the Rule Matters Even More After Taxes

Orman argues that the idea makes sense because it can take a long time to find a new job. “If you do lose your job, it could easily take you eight months to a year to get another one,” she says. If the account cannot cover that full stretch, a withdrawal only postpones the problem while sacrificing the one asset that might have remained untouched.

The broader labor market helps explain her caution. Unemployment stood at 4.2% in September, and job openings dropped to 7.1 million in August from 7,585 thousand in April. Fewer openings can mean a longer search for people who are out of work.

Consider a 45-year-old with $24,000 in a 401(k) and $4,000 in required monthly expenses. On paper, that would cover six months. Even before taxes, that falls short of Orman’s standard.

The tax hit makes the situation worse. Withdrawals from a retirement plan are generally subject to 20% withholding on the taxable portion. In this example, $4,800 would be withheld right away. The distribution is also taxed as ordinary income. If the person is under 59½, federal law usually adds a 10% early-withdrawal tax on top of normal income tax.

Using a 22% federal tax bracket as an example, the $24,000 would shrink to about $16,320 after taxes and the penalty. That would cover only about four months of bills before any state tax is considered, well below Orman’s eight-month threshold.

So a worker who believes they have six months of support may really have only four if the job hunt lasts eight months, leaving months five through eight with no paycheck and no retirement balance.

Orman puts it bluntly: “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 After-Tax Amount Determines Whether a Withdrawal Works

Whether the strategy works depends on how many months of expenses remain after taxes and penalties are applied. Keep the same $4,000 in monthly bills and the same tax assumptions, but raise the account balance to $60,000. After taxes and penalties, it nets $40,800, which covers about 10.2 months. That clears Orman’s eight-month test.

Two exceptions can improve the numbers. A 401(k) distribution taken after leaving a job, or after the year you turn 55, avoids the 10% extra tax. IRA withdrawals used to pay for health insurance during unemployment also avoid that penalty. In both cases, ordinary income tax still applies.

Use the Eight-Month Test Before Taking a Distribution

1. Calculate your essential monthly bills. Include housing, utilities, insurance, food, and minimum debt payments. Cut out anything nonessential right away, because every dollar saved extends your runway.
2. Estimate the after-tax value of the account. Subtract federal taxes, state taxes, and the 10% penalty if you are under 59½. Divide the remaining amount by your monthly expenses. If the result is under eight, leave the account untouched.
3. Use other funds first. Apply for unemployment benefits as soon as possible. Then use emergency savings. Orman also recommends a regular taxable investment account before turning to retirement money.
4. See whether an exception applies. The age-55 rule and the unemployment-related health-insurance exception can remove the 10% penalty and change the calculation.
5. Avoid cashing out when you leave a job. A direct rollover to an IRA can prevent withholding and the extra 10% tax, keeping your options open.
6. Build back a stronger cushion once you are employed again. Orman says the goal should be at least eight to 12 months of expenses, since a job search can last that long.

Her advice is simple: “You have got to take the steps today to protect your tomorrows in case it happens.”

In Orman’s view, retirement savings should only be touched if the after-tax amount can cover at least eight months of bills.