Laid Off at 62 From an Employee-Owned Steel Mill: Should He Claim Social Security or Spend the 401(k) First?

Claiming Social Security at 62 permanently cuts benefits by up to 30%, potentially erasing $8,600 a year for life as COLA widens the gap.

Claiming Social Security raises reported income, which can shrink ACA marketplace subsidies. This hidden cost often outweighs the monthly benefit gained.

Waiting until 70 grows Social Security benefits 8% per year, a return that outpaces the 10-year Treasury yield of roughly 4.5%.

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The morning shift shows up. The gate is locked. Word spreads by phone that the mill is done. That is roughly how it went for the roughly 253 workers at an employee-owned Illinois steel mill whose closure sent longtime employees home with intact retirement accounts and unanswered questions. Local agencies arranged unemployment help, retraining, and manufacturer connections, but none of that answers the question keeping a 62-year-old up at night: turn on Social Security now, or live off the 401(k) until the checks are bigger?

He is 62, earned $75,000 a year running equipment, has roughly $420,000 in a 401(k), no retiree medical, and three years until Medicare eligibility at 65. On forums where displaced steel and auto workers trade notes, the same question keeps surfacing: is it smarter to take the reduced check now, or draw down savings and let the benefit grow? There is no single clean answer, but there is a clear way to think through it.

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Claiming at 62 locks in a smaller check for life. For workers born in 1960 or later, full retirement age (FRA) is 67, which means filing at 62 is five years early. The Social Security Administration applies a tiered reduction that adds up to roughly 30% below the FRA benefit. Waiting past FRA adds 8% per year through age 70.

If his full retirement age benefit would be about $2,400 a month, claiming at 62 drops that to roughly $1,680. That gap is around $720 a month, or close to $8,600 a year, gone for the rest of his life. Every future cost-of-living adjustment (COLA) applies to the smaller base, so the shortfall compounds over time. The 2026 COLA was 2.8%, and even a modest adjustment like that widens the dollar gap each year.

The 8% annual credit for delaying past FRA is unusually generous compared with what safe money earns elsewhere. The 10-year Treasury currently yields about 4.7%, and the FDIC-reported national average on a 12-month CD runs about 1.7%. Spending some 401(k) money to let Social Security grow is, in effect, purchasing a larger inflation-adjusted lifetime income stream at a rate no bank will match.

The core choice is straightforward to frame, even when it is hard to resolve: claim now for immediate cash flow and preserve the 401(k), or spend from the 401(k) as a bridge and let the future benefit compound to a higher base.

Medicare eligibility does not begin until 65, leaving a three-year gap to fill. Private coverage through COBRA or an ACA marketplace plan can range from a few hundred dollars a month to well over a thousand, depending on subsidies tied to reported income. This is where the two decisions collide. Claiming Social Security raises income, which can shrink marketplace premium subsidies. That interaction alone has reversed many early-claim decisions once someone actually runs the numbers.

Unemployment benefits in Illinois can help cover the gap while he weighs retraining or a lower-paying bridge job. One important wrinkle for bridge jobs: in 2026, Social Security withholds $1 in benefits for every $2 earned above $24,480 annually for beneficiaries who are younger than FRA for the full year. That earnings cap can significantly reduce any benefit check for someone who files early and then picks up part-time work.

Illinois ranks in the bottom third on tax competitiveness, coming in at 38th overall, but the state fully exempts all retirement income from state income tax. Social Security benefits, 401(k) withdrawals, IRA distributions, and pension income all escape Illinois's 4.95% flat rate. That is a meaningful advantage for someone living off a combination of those sources during the bridge years. Once Medicare kicks in at 65, the standard Part B premium of $202.90 per month in 2026 becomes the new baseline cost for medical coverage.

At an employee-owned company, an Employee Stock Ownership Plan (ESOP) is a separate vehicle from a 401(k). The ESOP holds company stock and typically pays out on a schedule after separation, while a 401(k) is portable and can be rolled into an IRA immediately. If he holds both, the ESOP payout timing and any concentrated stock risk are worth examining before making any broader income decisions.

Two decisions carry more weight than everything else on the table.

Run the health insurance numbers first. Get an ACA quote at a lower reported income (living off 401(k) withdrawals) and compare it against a quote that includes Social Security. The subsidy difference often exceeds the monthly benefit itself.

Treat claiming age as the one decision that is hardest to undo. A part-time job, a rollover, even a retraining program can be adjusted later. A reduced benefit at 62 follows him for 25 or 30 years, and it follows a surviving spouse too.

The right sequence is clear: price the health coverage first, understand what an early claim permanently costs, and only then decide how hard the 401(k) has to work as a bridge. Individual health, family longevity, and spouse benefits can tilt the math in either direction, so the arithmetic is worth revisiting with a planner who sees the full picture.

Editor's note: This article was updated to reflect that the 10-year Treasury yield has risen to approximately 4.7% as of August 2026, that Illinois fully exempts all retirement income (including 401(k) withdrawals and Social Security) from state income tax, and that the Social Security earnings test limit for pre-FRA workers in 2026 is $24,480 annually.

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