The axe has fallen - advice requested on unintended / forced "retirement"

[Blanche]

So yesterday (May 15, 2026), five of my teammates and I had the dreaded “10 minutes with HR” meeting. The axe finally fell. While I knew this was probably coming, I was still caught off guard because I expected it to happen in late summer or early fall. Apparently not. HA!

Here are the particulars:

• 2 months of wages in lieu of WARN notice
• Severance pay (paid bi-weekly) through December 31, 2026
• Employer-paid healthcare through July 15, 2027 (the one-year anniversary of termination)

Family situation:

• Me and spouse: ages 55 and 53
• One young adult child (21)
• One disabled minor child (17, turning 18 in May 2027) currently on Medi-Cal

Finances:

Our current annual expenses include the mortgage (5.5%) and property taxes, but do NOT include healthcare, since that has been fully employer-funded.

Assets:

• Traditional 401(k): approximately 5x annual expenses
• Roth 401(k): approximately 3x annual expenses
• Roth IRA: approximately 20x annual expenses

“Income” (using quotes intentionally): We receive “Difficulty of Care” Medicaid waiver payments for our disabled child. Those payments would cover roughly 0.6x of our bare-bones annual expenses (not including health insurance premiums).

Apparently, Covered California does NOT count these waiver payments as income, which could be hugely beneficial for us. However, the waiver payments alone would still leave about a 0.4x gap between income and expenses, even living extremely lean.

Here’s the plan I’m considering, and where I’d appreciate advice:

Since I am 55 this year, I would owe no early withdrawal penalty on any 401K withdrawals. So If I liquidate my current 401(k) by December 2026, even after taxes withheld by the brokerage, it should be enough to completely pay off the mortgage.

Once the mortgage is gone, the waiver payments would reduce our remaining spending gap to roughly 0.2x annual expenses. My intention would then be to fill that smaller gap with whatever work I can get, including retail or big-box jobs if necessary.

Since Covered California apparently looks at current-year income, it seems like taking the large tax hit in 2026 could make sense. Our income in 2027 would likely be very low, which should help us qualify for subsidized Silver plans. Paying off the mortgage would also significantly reduce our required monthly expenses.

I understand the argument that I’d be giving up potential long-term market growth (maybe 7–8%) in order to pay off a 5.5% mortgage. But given our circumstances, my priority is stability; staying housed and making sure my chronically ill spouse’s medical needs are covered without going bankrupt before we eventually qualify for Medicare, Social Security, and my relatively small pension.

Am I missing anything major here? Am I misunderstanding anything? Your feedback / advise is much appreciated. Thank you!

 

[pb4uski]

I think that you are well positioned with 28x annual expenses in savings and over 80% of those savings in a Roth (plus SS later).

I'm not so sure of the wisdom of liquidating the 401k and creating a big tax bill to pay off the mortgage. In 2027 when you have no earnings or modest side gig earnings you could make 401k withdrawals at no or low tax cost and use that money to make the mortgage payments and/or mortgage balance paydowns.

The standard deduction for 2026 for MFJ is $32,200. 2027 will likely be more because it is adjusted for inflation. So let's say it is $34,000. You could manage your earnings, including taxable 401k withdrawals to be $34,000 and pay $0 in tax and use those withdrawals to pay the mortgage payments.

In other words, as long as the traditional 401k exceeds the mortgage and taxes on the withdrawal, then there is no need to panic. Just take solice in knowing that at any given time that you could rip off the bandaid and do a withdrawal and pay of the mortgage but there is no need to do it when if you do it slow and steady you can do it at a negligible tax cost.

In fact, 2026 would probably be the worst time to do it because the withdrawal would be on top of your wages for the year and likely puch you into a much higher tax bracket unnecessarily.

 

[jazz4cash]

Yeah, it's not missing out on growth in the market so much as keeping your options open and avoid pushing yourself into a higher bracket. Must be a more strategic way to pay it off early.

 

[Koolau]

I'm sorry the inevitable has finally happened. It does sound like you are well positioned to survive. I'm with pb4uski regarding the financial approach to your near/mid term situation.

I've often heard it said that during a major transition, it's usually better to not add to the chaos with any big "move" (physical or financial, etc.).

You're going to be fine through all of this. You can always pick up some gig w*rk if need be - but that's to worry about later. Just get through this year or two and all will become much more clear.

You have medical coverage taken care of and you have deep savings. Try to let those blessings guide you.

All the best and check back often.

 

[MC Rider]

In 2027 when you have no earnings or modest side gig earnings you could make 401k withdrawals at no or low tax cost and use that money to make the mortgage payments and/or mortgage balance paydowns.

I like this part. You can draw out a fair amount with little or no tax, potentially. I'm no Billionaire, but tax free sounds pretty sweet.

 

[Al18]

I'm surprised you have no savings account and no taxable brokerage account. I would create both and start building up 3 years of expenses in savings ASAP. Also a brokerage account comes in very useful and you sell stocks and stock funds held over 1 year and pay no federal taxes on the LTCG if you are in the 12% tax bracket.

 

[NW-Bound]

Assets:

• Traditional 401(k): approximately 5x annual expenses
• Roth 401(k): approximately 3x annual expenses
• Roth IRA: approximately 20x annual expenses

While losing one's job is a major upheaval, you are well financed to survive this well. It is unusual to have a Roth IRA so large relative to other retirement accounts.

You do not mention any after-tax asset. How much of the Roth IRA is from principal, i.e. not from investment gains, that you can draw penalty free and without it counted as income?

 

[Sunset]

Do NOT liquidate your 401K - the tax hit will be extremely high, much better as pb4uski says to pull some out each year to pay the existing mortgage and pay very low taxes. Otherwise you lose 22->25% of your 401K.

 

[Sunset]

OP - did you forget to include your savings account and regular brokerage accounts in your listing ?

 

[Koolau]

I don't know California well enough. Is there a possibility to downsize your living arrangements and come out ahead on all fronts (including RE taxes)?

 

[Blanche]

Thank you, everyone, for the feedback.

We no longer have a taxable brokerage account, as we liquidated it for the down payment on the home we now live in. Between the mortgage, property taxes, trying to max out the Roth 401(k), and paying tuition and housing costs for our older child attending a university several hundred miles away, it has been very difficult to save much each month.

As a result, we currently only have about five months’ worth of expenses in a savings account earning 3% interest.

To say I am terrified would be an understatement.

I realize now that the mortgage is a huge drag on our finances. To add insult to injury, home prices in our area have dropped, and we would probably be lucky just to break even if we sold.

At this point, I honestly do not know what my next steps should be. I also wish I had not simply assumed I would remain employed until age 60, because that had essentially been “the plan". That "plan" - in hindsight - is worse than no plan at all.

 

[OldShooter]

... Am I missing anything major here? Am I misunderstanding anything?

Yes. You are trying to do your own appendectomy, supplemented by random staff recruited on the internet.

Get thee to a good California CPA and pay to have your situation thoroughly analyzed. You have an unusually large number of moving parts in your life and they need a look from an exper. Paying now for this could easily get you some tactical and strategic ideas that will more than pay for the consultation. Even if you don't cover the costs you will have substantially increased confidence in your plan.

 

[cathy63]

Medicaid Waiver payments are not taxable income for either Fed or CA, so it's great that you can cover 60% of your spending needs with tax free money, and you're correct that it doesn't count towards your MAGI for ACA (aka Covered CA). One thing to watch out for with ACA is if the 21 yr old qualifies as a dependent on your tax return, and he/she has a job or enough excess scholarships to have to file a tax return, then you have to include his/her AGI in your ACA income calculations. See the IRS Form 8962 instructions for more details.

You didn't give any actual numbers for your expenses or your mortgage payment, so it's hard to say if it makes sense to liquidate the 401(k). I'm with others who say probably not. I'd try to pull out a bit less than 400% of the Federal Poverty Limit as taxable income so that you can still get ACA subsidies. Since 401(k) withdrawals will come proportionally from taxable and Roth, only 5/8 of what you withdraw will be taxable. So if you were trying to stay below 400% FPL in 2026 for a family of 4 (the whole tax family counts even if some aren't on the ACA plan), you could take $202,560 total from the 401(k). Would that be enough to make the mortgage payments and cover the extra .4x living expenses? If not, you could make up the difference as a withdrawal from the Roth IRA. If the 401(k) withdrawal exceeds what you need, then put the remainder in a taxable account or do a Roth conversion.

Also, you'll have COBRA available for 18 months after your employer stops paying your insurance premiums. It's usually better to start ACA in January because you have a new deductible when you switch plans, so COBRA for 5.5 months might be a better deal than going on ACA right away. It depends on your plan's costs, and whatever other health expenses you have that year.

 

[cathy63]

I realize now that the mortgage is a huge drag on our finances. To add insult to injury, home prices in our area have dropped, and we would probably be lucky just to break even if we sold.

Don't panic and sell too soon. It really doesn't look like you need to. But do look into appealing your property tax assessment. If your home is only worth what you paid for it and you've been there more than a year, your property taxes are probably based on a value that's higher than the current property value.

 

[Koolau]

Something to consider doing:

I think you're feeling a bit overwhelmed and helpless right now. I would suggest "doing something" pro-active. It doesn't have to be big.

Example:

Begin immediately to cut expenses - especially those that don't really cut into your "needs." So, for instance, how much do your family's cell phones cost you? DW and I have calculated that, including amortizing the cost of eventually replacing our cheap Androids PLUS our plan for 2 phones, we pay less than $60/month, all-in, for our ability to each carry a cell phone (we use Consumer Cellular).

Ditch all but one streaming service (or all of them if you really don't utilize what you have). Drop any premium channels on your Cable.

Do the simple stuff like turn out the lights, set the thermostat for day/night, etc.

Cut back on trips in the car - make a list and do a Round Robbin when you run errands (You're gonna have extra time since you're not gonna be w*rking - so make use of the time and save the miles/gas).

Maybe get rid of one car? DW and I did this. Our cars were old, so it didn't cut car payments. But Tags, Insurance and upkeep saved us probably $2K/year (not much - but it adds up).

Skip this year's vacation(s) and do home maintenance instead.

Any monthly expenses - see if they can be cut or eliminated.

Anything you hire done now (yard, pool, pest-control, etc.) Do it
yourself.




Okay, is this going to save you a lot of money. Maybe not, but now you are taking control. Your situation no longer controls you - you control it. There is power in that!! Take the power and feel good that you have taken the power. I think your feelings of being overwhelmed and powerless will abate. You will see that you have the power to get through this transition.

All the best. Please keep posting and let us know your progress as you transition. We are here for you.

 

[engineernerd]

I agree with pb4uski that recognizing additional income in 2026 when your tax bracket is the highest it will be for some time is a bad idea.

Other thoughts:

If the rules allow it, it may be better to use the Roth 401(k) rather than the traditional 401(k) to pay off your mortgage in 2027, using the traditional 401(k) for smaller as-needed withdrawals in future years. Only the investment earnings in the Roth, not the contributions, will count as taxable income, and if all you have left in 2028 is Roth accounts you might end up wasting some of your tax deductions each year. Depending how much of the Roth 401(k) balance is earnings and how much income your big box job generates.

If you liquidate your traditional 401(k) upfront will your MAGI in future years qualify you for Medi-Cal rather than Covered California? Maybe that'd be good, maybe bad, I have no idea.

And last but not least, I agree with pb4uski and others here that you have no need to worry.
(1) your total annual expenses are only 3.6% of your portfolio,
(2) as long as you continue to receive the Medicaid Waiver payments your withdrawals only need to be a fraction of your total expenses, and
(3) once you start receiving Social Security the same thing will be true again.

 

[DJRR]

To say I am terrified would be an understatement.

I realize now that the mortgage is a huge drag on our finances. To add insult to injury, home prices in our area have dropped, and we would probably be lucky just to break even if we sold.

Take a deep breath and relax. You experienced a trauma. It is OK to go through the emotions, but don't let it control you. You have a lot going for you:

1. You are paid through the end of the year. An optimist might say "I don't have to make any lifestyle changes at all for 7 months"
2. One of your largest expenses - healthcare - is fully paid for 14 months. Amazing.
3. You have saved 28x monthly expenses. Traditional FIRE advice would say you are probably good to retire today if you have social security coming and are happy with your lifestyle.
4. You have additional income to help care for your disabled child.
5. You have a spouse - do they have an income?
6. You have the ability to get another job if you want/need one.
7. You have a 5 month emergency fund.

All of these things are very positive - you did a great job. Do not make any rash decisions. Paying a huge tax bill to eliminate your mortgage is not a good idea. With your resources you can pay it off as quickly as 20 months with much lower taxes = 1/3rd now, 1/3rd December 2027, 1/3rd January 2028 and spread the taxes over 3 years.

I think you are correct that you are lacking a plan. Schedule a meeting with a good fee only fiduciary planner and get a plan. I think you will be surprised by the result. The only other thing I thought of was how your are paying for college? Do you have 529 or other resources for that?

Many people would envy your position, so take the time to work through the grief and get a solid plan and you will feel much better about your options.

 

[latexman]

3. You have saved 28x monthly YEARLY expenses. Traditional FIRE advice would say you are probably good to retire today if you have social security coming and are happy with your lifestyle.

Fixed it for you.

 

[badatmath]

I got laid off no severance in a conference call with ~ 1200 people. . . so in that sense you did much better off . I think the concept of the 401k cash out is just the voice of panic. . . and not necessarily the best plan. And if you decide it is the best plan, you still don't have to do it today, kwim? It will be there in month or a year or 5. . .

 

[Al18]

I think you have enough money to pull off an early retirement, but you need to make some smart decisions, and I don’t believe you are thinking clearly. I recommend making no decisions for a week or two. In the words of a famous investor “don’t just do something, stand there”

After that time, proceed slowly. For the rest of the year, consider making no more Roth 401K contributions. Instead, direct the extra money to your savings account. Tax wise - there’s no difference for this year.

 

[pb4uski]

I'm surprised you have no savings account and no taxable brokerage account. I would create both and start building up 3 years of expenses in savings ASAP. Also a brokerage account comes in very useful and you sell stocks and stock funds held over 1 year and pay no federal taxes on the LTCG if you are in the 12% tax bracket.

I understand what you are saying, but Roth contributions can be withdrawn tax-free anytime and growth after 59-1/2 so IMO the first part is actually better than a taxable account in that it can be withdrawn tax free anytime.

 

[Al18]

As I understand it, all Roth contributions must be withdrawn first, followed by Roth conversions and lastly earnings are withdrawn.

 

[pb4uski]

Yes. You are trying to do your own appendectomy, supplemented by random staff recruited on the internet.

Get thee to a good California CPA and pay to have your situation thoroughly analyzed. You have an unusually large number of moving parts in your life and they need a look from an exper. Paying now for this could easily get you some tactical and strategic ideas that will more than pay for the consultation. Even if you don't cover the costs you will have substantially increased confidence in your plan.

OS, I was a CPA for 35 years and I can tell you that most CPAs are not equipped to do this sort of analysis. The vast majority are audit or tax. While I'm not sure that the OP needs the professional help that you recommend, if they do, they need to look for a CPA with a PFS (Personal Financial Specialist). They are few and far between as audit and tax are more lucrative.

 

[pb4uski]

...Since 401(k) withdrawals will come proportionally from taxable and Roth, only 5/8 of what you withdraw will be taxable. ...

Cathy, can the OP sidestep this proportional withdrawal thing by rolling over their Roth 401k into their current Roth IRA? And then just withdraw from the traditional 401k penalty free using the rule of 55 to manage their taxable income and withdraw contributions to the Roth IRA for tax free income?

 

[SnowballCamper]

Take a deep breath and relax. You experienced a trauma. It is OK to go through the emotions, but don't let it control you. You have a lot going for you:

1. You are paid through the end of the year. An optimist might say "I don't have to make any lifestyle changes at all for 7 months"
2. One of your largest expenses - healthcare - is fully paid for 14 months. Amazing.
3. You have saved 28x monthly expenses. Traditional FIRE advice would say you are probably good to retire today if you have social security coming and are happy with your lifestyle.
4. You have additional income to help care for your disabled child.
5. You have a spouse - do they have an income?
6. You have the ability to get another job if you want/need one.
7. You have a 5 month emergency fund.

All of these things are very positive - you did a great job. Do not make any rash decisions. Paying a huge tax bill to eliminate your mortgage is not a good idea. With your resources you can pay it off as quickly as 20 months with much lower taxes = 1/3rd now, 1/3rd December 2027, 1/3rd January 2028 and spread the taxes over 3 years.

I think you are correct that you are lacking a plan. Schedule a meeting with a good fee only fiduciary planner and get a plan. I think you will be surprised by the result. The only other thing I thought of was how your are paying for college? Do you have 529 or other resources for that?

Many people would envy your position, so take the time to work through the grief and get a solid plan and you will feel much better about your options.

I think this is great advice!
As for paying off the house, I did that for the simplicity of managing cash flow (and for DW), but it wasn't an optimal decision according to the arithmetic. I certainly would not jump up a tax bracket just to pay off a mortgage at your current rate.