Severance Math: How Far Will Your Package Actually Take You?

A severance offer feels like a windfall. "Six months of pay!" sounds like a long cushion. But severance is taxed, the calendar shifts when COBRA kicks in, and your benefits end on dates that rarely line up with your last paycheck. The honest question isn't "how big is the package?" — it's "what's my real run-out date?"

If you've just been handed a separation agreement, the most valuable thing you can do — before you sign anything — is convert the package into a single number: the date your money runs out at your real spending rate.

Calculate your post-severance runway →

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Severance Is Not Six Months of Pay

A "six-month severance" almost never gives you six months of cash flow. Here's why:

Taxes hit harder than you expect. Severance is taxed as supplemental wages. Most employers withhold at the IRS flat 22% federal rate (37% on the portion above $1M), plus FICA and state. That looks fine on the pay stub — but if your marginal rate this year is 32% or 35% because of the rest of your salary, you'll owe the difference at filing. After all-in taxes, the cash that actually lands is usually 60-70% of the headline number.

Lump sum vs. salary continuation changes everything. A lump sum gives you the cash now, but it's all taxed in one year — sometimes pushing you into a higher bracket. Salary continuation spreads it out, keeps you on payroll (sometimes with benefits), but disappears the moment you accept a new role.

Benefits cliff. Health insurance usually ends on the last day of the month you separate, or 30-60 days after, depending on the plan. After that, you're on COBRA — which is the same coverage at the full unsubsidized cost (federal law caps it at 102% of the plan's full cost), often $700-$2,000/month for a family.

Unused PTO and bonus payout vary wildly. Some states require PTO payout. Some don't. Earned but unpaid bonus may or may not be in the package. Read the agreement.

The point: don't budget against the headline number. Budget against the after-tax cash that actually lands in your account, on the actual dates it lands.

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The Severance Runway Formula

Use this in plain English:

After-Tax Severance + Liquid Savings + Unemployment Benefits − (Monthly Burn × Months) = Cash Remaining

Set "Cash Remaining" to your buffer (the floor you refuse to cross), solve for months, and you have your runway.

A worked example:

• Severance: $60,000 lump sum (gross)
• After taxes (~32% effective): $40,800
• Liquid savings already on hand: $22,000
• State unemployment: $550/week, eligible after the severance period ends — say 20 weeks = $11,000
• Total available cash: $73,800

Now the burn side:

• Monthly burn pre-layoff: $5,200
• COBRA add-on (was paid by employer): $1,400/month
• Post-layoff burn: $6,600/month

Runway: $73,800 ÷ $6,600 = 11.2 months

That's a real number you can plan against. "Six months of severance" was the marketing version. 11.2 months is the truth — assuming you don't blow through it. (And if your state offsets unemployment dollar-for-dollar against severance pay — many do — that 11.2 drops to closer to 9.5. Check your state's rules before you bank on the UI line.)

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The Hidden Costs Severance Doesn't Cover

Layoffs trigger spending you didn't have before. Build these into your post-severance burn rate or you'll burn through the package faster than the math predicts:

COBRA or marketplace health insurance. The single biggest line item most people miss. If your employer was paying $1,400/month toward your family plan, that cost is now yours.

Self-employment quarterly taxes. If you pick up consulting income during the search, you owe estimated taxes. Set aside 25-30% of every consulting check. (See Freelancer Cash Runway for a full system.)

Retirement contributions. No more 401(k) match, and you may want to fund an IRA. Decide before you spend the cash whether you're protecting retirement or pausing it.

Job search expenses. Resume help, LinkedIn Premium, networking meals, travel for interviews, professional photos, occasional career coaching. Budget $300-$800/month.

Lifestyle creep from being home. Heat is on more. You eat lunch out more. You DoorDash because you're stressed. Track this — it's real and it adds up.

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Lump Sum vs. Salary Continuation: Which to Take

Companies sometimes offer a choice. Here's how to think about it:

Take the lump sum if:

• You're confident you can manage it without overspending
• You expect to start a new job soon (salary continuation usually ends when you do)
• You want to invest or pay down debt with the cash
• The continuation comes with strings (e.g., non-compete enforcement)

Take salary continuation if:

• It keeps you on benefits (huge — $1,000-$2,000/month of value)
• You're worried about spending discipline
• Your search is likely to take longer than the continuation period
• The taxes on a lump sum would push you into a higher bracket

In both cases, model both scenarios with your real numbers. The "right" answer depends on your tax situation, benefits situation, and how soon you expect to land.

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Don't Sign Until You Know Your Number

The separation agreement usually has a review period. If you're 40 or older and the release waives age discrimination claims, federal law (the OWBPA, per EEOC guidance) gives you 21 days to consider an individual offer or 45 days for a group layoff, plus 7 days to revoke after signing. Younger workers get whatever the agreement specifies — often a week, sometimes more if you ask. Use the time. Before you sign:

1. Run your post-severance burn rate (with COBRA, without the employer benefits, with realistic job search costs).

2. Estimate your after-tax severance by your actual marginal rate, not the 22% withholding number.

3. Confirm unemployment eligibility in your state. Severance can sometimes delay benefits, depending on how it's structured.

4. Calculate your runway to the day, not the month. If your runway is shorter than your honest job search timeline, that changes what you negotiate for.

5. Negotiate the gaps. More severance weeks. Extended COBRA subsidy. Outplacement services. Unused PTO payout. Companies expect this. The worst answer is no.

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Plan for the Search Taking Longer Than You Think

Job searches in normal markets average 3-6 months for mid-career professionals. In tougher markets, especially for senior or specialized roles, 6-12 months is common. The 2024-2026 wave of tech and white-collar layoffs has stretched timelines in plenty of sectors — assume your industry is one of them until you have evidence otherwise.

A safe planning rule: assume your search takes 1.5x what you'd guess. If you think 4 months, plan for 6. If you think 6, plan for 9.

That doesn't mean you'll need every month. It means your runway should exist at the longer horizon, so the search isn't financially squeezed into desperation. Desperate searches lead to bad job acceptances, which lead back to this post in 18 months.

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See Your Run-Out Date

Severance buys you time, but only if you know how much. Plug your numbers into a daily-resolution runway tool and find your real run-out date — accounting for taxes, COBRA, unemployment income, and the expenses that don't pause just because your paycheck did.

Calculate your run-out date → Your data stays on your device.

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MyCashRunway applies startup-style cash runway thinking to your personal finances. See the daily reality of your cash flow, spot the danger days, and know exactly when your money runs out.