Laid off at 52 with $40,000 in severance. Pay the mortgage or hold the cash?

The question

An illustrative letter.

The answer

My dear, twenty-four years is a long time to give one company, and I am so sorry it ended this way. A layoff at 52 can feel like a verdict on your whole working life. It is not. It is a business decision about a payroll, made by people who did not know your worth as well as you do. Take a breath. You have more options than it feels like today, and the $40,000 is your chance to choose carefully rather than quickly.

Why does cash matter more than the mortgage right now?

Because money in the bank gives you time, and time is what lets you pick the right next job instead of grabbing the first one offered.

Paying extra on a mortgage feels safe, and in ordinary times it can be a good use of money. But it has two catches when your income has just stopped. First, extra payments on most mortgages shorten the loan without lowering your monthly payment, so your bills next month stay exactly the same. Second, money paid into the house is hard to get back out. Borrowing against your home is much harder without a paycheck, just when you might need it. Cash in the bank, on the other hand, can pay any bill on any day.

How long can the severance carry us?

Start by finding out what you will actually keep. Severance is taxed as wages. Employers often withhold federal income tax at a flat 22 percent on it, plus Social Security and Medicare, and Kentucky and local taxes come out too. So if the $40,000 is before tax, expect roughly a third less in hand. Your actual tax is settled when you file, so keep the paperwork.

Then add up your essential monthly bills: the mortgage, utilities, food, insurance, car costs and any minimum debt payments. Divide what you keep by that number. The answer is your runway, the number of months you can live on the severance, and it will stretch further once unemployment benefits arrive. Seeing that number in writing often brings more calm than anything else this week.

Should we file for unemployment if we have severance?

Yes, and right away. In Kentucky, severance pay is generally not counted as wages for unemployment, so it usually does not reduce your benefits, though pay given in place of notice can reduce them for a few weeks. The state decides your claim, not your employer, so file in the first week and let the rules work for you.

If you have not yet signed your severance agreement, read it slowly. When workers aged 40 or older are asked to give up age discrimination claims in return for severance, federal law gives them at least 21 days to consider the agreement, or 45 days when a group is laid off together, and 7 days to change their mind after signing. Many people have an employment attorney read it first.

What do we do about health insurance?

This is the most urgent decision after the paycheck itself. You have two main choices.

• COBRA. You can usually keep your employer's health plan for up to 18 months. It keeps your doctors and coverage the same, but you now pay the whole premium, up to 102 percent of the plan's full cost, which surprises many people.
• The Health Insurance Marketplace. Losing job-based coverage gives you a special window of 60 days to enroll in a Marketplace plan. Depending on your household income for the year, you may qualify for help with the premiums.

Compare the two side by side before your window closes. A gap in coverage at 52 is a risk not worth taking.

Should I touch my retirement savings?

Please don't, if you can possibly avoid it. At 52, taking money out of a 401(k) usually means paying income tax on it plus a 10 percent additional tax. There is an exception for people who leave their job in or after the year they turn 55, but at 52 it does not apply to you.

Your savings can stay in your old employer's plan, or you can move them to an IRA. If you move them, ask for a direct transfer from one account to the other. If a check is paid to you instead, 20 percent is usually withheld for tax, and you have only 60 days to deposit the full amount. Those years of saving are your retirement, and they deserve to be kept whole.

Where should the cash sit while I look?

Somewhere safe and easy to reach: a savings account at a federally insured bank or credit union, separate from your checking account. This is not the moment to invest it in stocks, because you may need it soon and markets can fall just when you do. Move a set amount each month into checking, as if it were a paycheck, and you will always know how much runway is left.

When would paying down the mortgage make sense?

Once you have a new job, your emergency fund is rebuilt, and your retirement savings are back on track, extra mortgage payments can be a fine way to head toward retirement owning your home outright. Until then, keep paying the mortgage on time from your savings. If money ever runs tight, call your lender early, before a payment is missed, and ask what options they offer.

What do I bring to the next job?

Twenty-four years of showing up, solving problems and being trusted. Federal law protects workers aged 40 and over from age discrimination in hiring. Tell your network, the people you worked beside, your suppliers and your customers, that you are looking. The cash in your account gives you the time to find work that values all of it.

One thing to do this week

File for unemployment, move the severance into an insured savings account, and compare COBRA with a Marketplace plan.