How to Lose Several Grand
As clickbait-ey as this title sounds, it’s actually something that a LOT of people do in their lives (and no, I am not even talking about lottery tickets or credit card debt). Heck, I’ve done it too a few times. I’m talking about leaving my job before my match has been fully vested.
Before we go on, let’s talk about vesting and maybe why it might be a good idea, especially when you are just starting out in the workforce, to carefully consider when you make your next career move It does without saying that my generation, the millennials, is not expected to just stay at one job like their predecessors.
But, I digress. Are we ready? Let’s. Go.
The Retirement Plan (401k/403b/457), The Match, & Vesting
So… what exactly is “vesting”?
Put simply, it’s just the process by which you get to retain a portion of the total match you receive from your employer for your retirement plan. It’s also part of a way that employers try to retain their employees (along with offering a match). I won’t get into it in much detail yet but here links to some helpful primers on the different employee-sponsored retirement accounts available.
When you begin contributing to your retirement plan at work, many employers will match those contributions, a percentage per dollar you contribute, up to a certain percentage of your income (usually 6%). For example if your employer matches 100% of your contributions up to 6% of your salary, for every dollar you contribute, your employer will “match” that contribution with a dollar until you’ve contributed 6% of your salary for the year. Rinse and repeat next year. You’ll get the best bang for your buck (in terms of retirement saving) by 1) “taking the match” by contributing at least the percentage up to which the employer will match and 2) maxing out your contributions.
At the same time, your vesting period begins, and of course, there are multiple types of vesting, and it will depend on your employer:
- Immediate Vesting: You get to keep 100% of all match contributions when you begin contributing to your retirement plan. This type of vesting is not very common, but if you are able to immediately vest, this is the most beneficial situation for you!
- Cliff Vesting: This is “all-or-nothing” when it comes to keeping the employer match. After a set period of time, you’ll fully vest… but leave your job before the period ends and you’ll give it ALL back.
- Graded Vesting: In this type of vesting, you will have a set period, where after each year or so, you will get to keep a certain percentage of your employer’s match, until you are fully vested. Leave your job early, and you’ll lose a portion of the match, depending on when you leave. This type is common.
As mentioned above, employers will typically match contributions and allow those contributions to be vested as a way to retain employees. But the kinds of vesting used should be reframed: they are a disincentive to the employee leaving their job, lest they lose thousands of free dollars that could have been invested.
To see what I mean, let’s use a hypothetical situation.
How To Lose Thousands of Dollars
First off, I want to acknowledge that there are many valid reasons for quickly leaving a job. It could be due to a hostile work environment, lack of career progression, or personal circumstances. If you’re stuck in a crappy work situation, by all means, get out as fast as possible… I sure did. But I do want to address a recent trend of job-hopping (which I am guilty of too) and one aspect of it that many might not consider.
So let’s say you are a fresh college grad, BS in hand, with a job offer at Company A. You’re excited to finally be in the “Real Word” and putting that degree to work. Company A will pay you an annual salary of $50k. Company A also offers a 401k with a match, where for each dollar you contribute, they will match with a dollar contribution to your 401k up to 10% of your salary. You don’t really pay it any mind now, but Company A has a graded vesting policy where after each year, you get to retain a portion of your contributions:
% of Match (5 Years)
Depending on how long you work for Company A, this is a snapshot of what you stand to gain, but also lose ($50k salary, 10% Match):
Let’s say you stay at Company A for 2 years and decide to take a job opportunity at Company B. Assuming you’ve kept up the 10% contribution to your 401k to get the full match, you’ll have to part ways with roughly $8,000 in contributions from Company A. Needless to say, that’s a serious chunk of change in “free money” to part ways with. Assuming you’re 22 years old and plan to retire at 55, $8,000 invested for a period of 31 years (starting at the year you quit) with an average rate of return of roughly 7% (taking into account inflation) will yield about $65k.
When you leave your job before your vesting period completes, you could potentially be throwing away tens of thousands of dollars over the life of your career. Of course, this thought experiment is very limited in its view and doesn’t consider other factors. My only hope is that you take the time to consider how much money you’ll keep/lose when you ultimately leave your job. You should never give up “free money” unless you really, really have to.
Let me know your thoughts in the comments.
