Severance at 62: COBRA Bridge vs Early Social Security Claim

You are 62. You were just laid off from a $140,000/year role. Your 401(k) balance is $850,000. Your severance is $80,000. Your projected Social Security benefit at full retirement age of 67 (for those born 1960+) is $2,400/month. You can claim Social Security now at 62 — but the early-claiming reduction under 42 U.S.C. §402(q) is roughly 30%, reducing the monthly benefit to approximately $1,680. That reduction is permanent. Meanwhile, the earnings test under 42 U.S.C. §403(b) and the Rule of 55 under IRC §72(t)(2)(A)(v) create interacting constraints that most laid-off 62-year-olds don't fully understand. Here is the framework.

The quick answer: At 62 with severance, claiming SS at 62 locks a permanent ~30% reduction vs FRA. The earnings test claws back $1 per $2 above $24,360. COBRA bridge plus 401(k) draws to 65 usually wins.

The early-claiming penalty: a 30% permanent reduction

Under 42 U.S.C. §402(q) and the SSA actuarial reduction schedule, claiming Social Security at 62 (60 months before the FRA of 67 for those born 1960+) reduces the benefit by approximately 30%:

• FRA monthly benefit: $2,400
• Age 62 monthly benefit: $2,400 × 70% = $1,680/month
• Permanent monthly loss: $720/month
• Annual loss: $8,640
• Cumulative loss over 20 years (age 67 to 87): $172,800 in nominal dollars

The break-even age between claiming at 62 ($1,680/month) and FRA at 67 ($2,400/month):

• Cumulative payments at 62-78 (age 79): $1,680 × 12 × 17 = $342,720
• Cumulative payments at 67-79 (age 79): $2,400 × 12 × 12 = $345,600
• Break-even falls roughly at age 79-80

SSA actuarial life expectancy for a healthy 62-year-old is approximately 82 (men) to 85 (women). Most claimants live past the break-even — making early claiming a net loss unless health flags or cash-flow gaps dominate.

The earnings test: severance-year claiming can claw back benefits

Under 42 U.S.C. §403(b), Social Security claimants below FRA face an earnings test: for every $2 of earned income above $24,360 (2026 limit), $1 of Social Security benefits is withheld.

Severance income treatment under the earnings test depends on structure:

• Salary continuation (e.g., $80K paid as $13,333/month for 6 months): generally treated as wages by SSA under POMS RS 01401.030. Counted toward the earnings test in the year received.
• Lump-sum severance paid AFTER separation: typically NOT counted under POMS RS 01401.130 — treated as compensation for past services rather than current wages.
• Pre-separation final paycheck including accrued vacation/PTO: counted as wages in the year of separation.

The earnings test math on $80K salary continuation

If you claim Social Security at 62 in February 2026 and receive $80K salary continuation paid as $13,333/month from March through August 2026:

• 2026 earnings (subject to test): $80,000
• Exempt amount: $24,360
• Excess earnings: $80,000 − $24,360 = $55,640
• Benefit reduction: $55,640 / 2 = $27,820 of Social Security benefits withheld
• Your annual Social Security at 62: $1,680 × 12 = $20,160 — fully withheld (since $20,160 < $27,820)
• Net Social Security received in 2026: $0

Claiming at 62 in this scenario gives you zero Social Security in 2026 (the entire benefit is withheld via the earnings test) AND permanently reduces your future benefit to $1,680/month. You get nothing now and a smaller check forever. This is the worst possible outcome — and many laid-off 62-year-olds make this mistake.

The earnings test math on $80K lump-sum severance

If the same severance is paid as a lump sum in March 2026 (after the official separation date), and you claim Social Security in April 2026:

• 2026 earnings subject to test: pre-layoff wages YTD only (not the severance lump sum)
• If YTD wages through layoff date = $30K, exempt amount is $24,360, excess is $5,640, reduction is $2,820
• Net Social Security received in 2026: $20,160 − $2,820 = $17,340

Lump-sum severance avoids the earnings test trap. But you still face the permanent 30% reduction by claiming at 62.

The earnings withheld are not lost forever

Important nuance: Social Security benefits withheld via the earnings test are not permanently lost. Once you reach FRA, SSA recalculates your benefit upward to credit the withholding back. The recalculation effectively treats months of withheld benefits as if you had not claimed them — your future monthly benefit is recomputed.

For a 62-year-old who has all benefits withheld in 2026 due to the earnings test, SSA later recalculates as if you had claimed at age 62 + 12 months instead of 62 — a slightly higher monthly benefit going forward. The withheld benefits are not paid back as a lump sum; they're smoothed into a higher monthly payment over your remaining lifetime.

The Rule of 55 at age 62: largely irrelevant

The Rule of 55 under IRC §72(t)(2)(A)(v) provides penalty-free 401(k) access for those who separated from service in or after the year they turned 55. At age 62, your separation is well past the 55 trigger — the Rule of 55 applies to your current employer's 401(k).

But here's the practical issue: at age 62, you're past 59½ — the universal threshold for penalty-free retirement-account distributions under IRC §72(t). The 10% early-withdrawal penalty doesn't apply to ANY of your retirement accounts at this age. The Rule of 55 advantage closes once you cross 59½.

Your concern at 62 is income tax on distributions, not penalties. The decision is which account to draw from, in what amount, in which year — optimizing for bracket positioning and future IRMAA exposure rather than penalty avoidance.

The bridge-to-Medicare plan

At 62, you have 36 months to Medicare eligibility at 65. Your bridge funding sources, in typical priority order:

1. Severance lump sum (year 1)

• $80K severance, net after federal + state tax: ~$55K-$60K
• Covers year 1 living expenses ($65K-$80K) with modest supplementation from 401(k) or savings
• If lump sum, avoids Social Security earnings test trap

2. 401(k) distributions (years 1-3)

• $850K 401(k) balance — penalty-free withdrawals at age 62
• $30K-$50K/year fills the 12-22% bracket for single filer
• Strategically positions for Roth conversions during bridge years

3. Roth IRA basis withdrawal (any year)

• Roth IRA contributions are tax- and penalty-free at any age
• Roth earnings tax-free after 59½ (universal IRC §408A rule)
• At 62, all Roth IRA money is fully accessible without tax

4. Taxable brokerage / savings

• Tax-loss harvesting opportunities during low-income bridge years
• Capital gains at 0% LTCG bracket if total taxable income stays under $48,350 for single (2026)
• This is a once-in-a-lifetime tax-free capital gains opportunity for many bridge-period retirees

Worked example: 62-year-old laid-off manufacturing manager

A 62-year-old manufacturing operations manager in Cleveland, Ohio, single filer, just laid off after 28 years. Pre-layoff income: $140,000. Assets:

• 401(k): $850,000
• Roth IRA: $120,000 (contributions $50K, growth $70K)
• Taxable brokerage: $180,000 (basis $130K, unrealized gain $50K)
• Checking/savings: $60,000
• Home: paid off, $280,000 market value

Severance: $80,000 lump sum. Social Security projected FRA benefit: $2,800/month. Estimated annual living expenses: $72,000.

Strategy A: Claim Social Security at 62

• SS benefit at 62: $2,800 × 70% = $1,960/month = $23,520/year (permanent reduction)
• 2026 income: $80K severance lump sum + $23,520 SS = $103,520. Earnings test on YTD pre-layoff wages: minimal reduction, severance lump sum not counted. Net 2026 income for living: ~$95K (covers expenses with cushion)
• 2027-65 onward: $23,520/year SS + needed bridge withdrawals (~$50K from 401(k)) = $73,520/year
• 2027 federal tax: SS combined income ($23,520 / 2 + $50K) = $61,760 — 85% of SS taxable (=$19,992 taxable). Total taxable: $50K + $19,992 = $69,992. Federal tax: ~$8,500. Net: ~$65K
• Lifetime SS benefit (age 62 to 87, 25 years): $23,520 × 25 = $588,000 nominal

Strategy B: Delay Social Security to FRA at 67, bridge with 401(k)

• Years 62-67 (bridge): $80K severance + $50K-$60K annual 401(k) draws + Roth basis + brokerage
• Bridge cost from 401(k): 5 years × $50K = $250K of 401(k) consumed; remaining 401(k) at 67: ~$600K (assuming 0% real return) or higher with market growth
• SS benefit at 67: $2,800/month = $33,600/year
• 2027 federal tax during bridge: $50K 401(k) + maybe $10K brokerage cap gain at 0% bracket = $50K taxable. Federal tax: ~$5,000. Net: ~$45K — needs supplementation from Roth basis ($25K) or savings
• Lifetime SS benefit (age 67 to 87, 20 years): $33,600 × 20 = $672,000 nominal — $84K more than Strategy A

Strategy C: Hybrid — bridge to 65 (Medicare), claim SS at 65

• Bridge to 65 with 401(k) draws — same as Strategy B for years 62-65
• Claim SS at 65: $2,800 × (1 − 13.3%) = $2,427/month = $29,124/year (~13% reduction vs FRA)
• Lifetime SS benefit (age 65 to 87, 22 years): $29,124 × 22 = $640,728 — $52K more than Strategy A, $31K less than Strategy B

The recommended path

For this Cleveland manager, Strategy B (delay SS to FRA 67, bridge with 401(k)) is optimal under standard life expectancy assumptions:

• Highest lifetime SS benefit ($672K vs $588K for Strategy A)
• Larger SS in later years when it's needed most for healthcare and long-term care
• Bridge years 62-67 use $50K-$60K/year of 401(k) — reduces future RMD-driven IRMAA exposure
• Opportunity to convert pre-tax 401(k) to Roth during low-income bridge years at 22-24% brackets (vs future 32%+ RMD-driven brackets)

Strategy C (claim at 65) is a reasonable middle ground if longevity assumptions are uncertain or if the bridge funding from 401(k) is straining the asset base.

The Roth conversion opportunity during the bridge

The bridge years 62-67 are typically the highest-value Roth conversion years in a retiree's lifetime. Pre-tax 401(k) balances will eventually be subject to RMDs at age 73 (born 1951-1959) or 75 (born 1960+) under SECURE 2.0 §107.

At age 73-75 with significant pre-tax balance, RMDs combined with Social Security can push you into the 22-32% bracket — far above the 12% bracket accessible during low-income bridge years.

For the Cleveland manager with $850K of pre-tax 401(k):

• Without conversions: at 75, $850K (assume 5% real growth = ~$1.18M) / 26.5 RMD divisor = $44,500 first RMD
• $44,500 RMD + $33,600 SS + investment income = $80K+ taxable income — 22-24% bracket at minimum, with IRMAA cliffs at every threshold
• With $50K/year conversions during bridge years 62-66 ($250K total converted at 22-24% brackets), the 401(k) at 75 is ~$900K — RMD ~$34K, total taxable ~$70K — saves bracket positioning and reduces IRMAA exposure for the next 20+ years

The Roth conversion arbitrage during the bridge years is one of the highest-leverage retirement planning moves available — typically worth $30K-$80K of lifetime tax savings for households with $500K-$1.5M in pre-tax balances.

The COBRA + ACA bridge for health insurance

From age 62 to Medicare eligibility at 65, you need 3 years of health insurance bridge. The available paths:

COBRA (18 months, age 62 to 63.5)

• Continues your former employer's plan at 102% of actual premium under IRC §4980B(f)
• Typical cost for a 62-year-old single: $750-$900/month; family: $2,000-$2,400/month
• Preserves existing doctor/specialist relationships and deductible progress
• 18 months runs out at age 63.5 — need to transition to ACA Marketplace

ACA Marketplace (age 63.5 to 65)

• Premium tax credit under IRC §36B caps premium at 8.5% of MAGI up to 400% FPL ($62,400 single, $84,480 household of 2 in 2026)
• Above 400% FPL, no subsidy — full unsubsidized premium
• For a 62-year-old keeping MAGI below 400% FPL, ACA premium is ~$440/month capped (vs $1,500-$2,000 unsubsidized)
• Key constraint: 401(k) withdrawals and Roth conversions count toward MAGI. Aggressive Roth conversion during bridge years can push MAGI above the cliff, costing $10K+/year in lost ACA subsidies.

The interaction between Roth conversions and ACA subsidies is the key planning trade-off during the bridge. A $50K Roth conversion may save $5K-$10K of long-term RMD-bracket tax — but if it pushes you over the 400% FPL cliff and costs $12K in ACA subsidies, the net is negative. Model both effects before committing to the conversion size.

The decision matrix for severance at 62

The IRMAA 2-year lookback trap

Medicare Part B and Part D premiums at age 65 are based on MAGI from 2 years prior (per 42 U.S.C. §1395r(i)(4)). At 2026 IRMAA tiers:

• $103K-$129K single MAGI in 2024 = +$74/month Part B + $13.70 Part D = $1,049/year surcharge
• $129K-$161K MAGI = +$185/month Part B + $35.30 Part D = $2,640/year
• $161K-$193K MAGI = +$295.90/month Part B + $57 Part D = $4,235/year

A 62-year-old who Roth-converts $80K in 2024 — when their normal salary is $140K — pushes 2024 MAGI to $220K. Two years later at 65, they face the $193K-$500K IRMAA tier: +$406.90/month Part B + $78.60 Part D = $5,826/year extra Medicare for the duration of that tier. This is the IRMAA lookback trap that catches pre-retirement Roth converters.

Plan Roth conversions DURING the bridge years (62-64), AFTER the layoff has dropped your MAGI. Avoid converting in the year before retirement when your normal salary is still pushing MAGI up.

Key takeaways

• Claiming Social Security at 62 vs FRA (67) creates a permanent 30% reduction — for most retirees, lifetime benefits are higher with delayed claiming.
• The Social Security earnings test under 42 U.S.C. §403(b) reduces benefits by $1 per $2 of earnings above $24,360 (2026) for claimants below FRA — severance paid as salary continuation can claw back most or all of early SS payments.
• Lump-sum severance paid after separation typically does NOT count for the earnings test, while salary continuation does.
• The Rule of 55 is largely irrelevant at age 62 — all retirement-account distributions are penalty-free past 59½ regardless.
• The bridge years 62-67 are optimal for Roth conversions during low-income windows, but watch the ACA 400% FPL cliff and IRMAA 2-year lookback.
• Health insurance bridge: COBRA 18 months → ACA Marketplace 18 months → Medicare at 65. Total cost roughly $45K-$70K single, $80K-$110K family for the 3-year bridge.
• The IRMAA lookback means 2024 MAGI determines 2026 Medicare premiums — avoid large Roth conversions in the 2 years before Medicare eligibility.
• For most 62-year-olds with $500K+ retirement assets, bridging with 401(k) draws to FRA 67 produces the highest lifetime outcome.