One of the nice perks many employers offer is a match to your own retirement contributions. An employer match can be a powerful tool to help you grow your retirement savings more quickly. However, to encourage employee longevity, many employers do not let the employee access the money the employer contributes until the employee is “vested.”
What Does “Vested” Mean?
Vested refers to an amount of time you must work for your employer before you are entitled to the full amount of money they deposit in your retirement account.
In my former life as a college instructor, I deposited 8% of my salary into my retirement fund, and my employer matched that amount, meaning I was then getting 16% of my salary growing in my retirement fund every year. However, there was a catch. I had to work for my employer for 5 years before I was entitled to the employer’s half of my retirement fund. It would take me 5 years to become vested. If I left my job before working for 5 years, I would have lost all of my employer’s match, which, in this case, was half of my retirement fund. That is strong motivation to stay at least 5 years, which I did.
What Is Partially Vested?
My employer may have been an anomaly with their rule that if I worked for less than 5 years I did not get any of my employer’s contributions. In most companies, you are fully vested between 3 and 7 years. Many other companies offer partial vesting. For instance, after one year on the job you may receive 20% of your employer’s contributions. After three years, you may receive 60% of your employer’s contributions. Each company has different rules, and you will need to check with the Human Resources department to learn the rules for your company.
How Are Your Own Contributions Affected?
Vesting simply refers to your employer’s contributions. Your own retirement contributions are yours and are not affected by vesting. If I would have left my job after 4 years, I would have forfeited my employer’s contributions, but I would have retained all of my own contributions and been able to roll that money over into an IRA.
Consider Carefully Before Changing Jobs
When you are considering changing jobs, the vestment duration should play a part in your decision. If you are only a year away from being vested, it may be worthwhile to stay on the job a bit longer. Keep in mind, if you are vested, you are not only walking away with your employer’s match, but you stand to make a great deal more in compound interest while the money is growing in your retirement account over the course of your working years.
Deciding when to leave a job is never easy, but if you are close to being vested, it may be worthwhile to stick it out. When you are hired, make sure to find out how much your employer contributes to your retirement on your behalf, how many years are required to be vested and if the company offers partial vesting.