When Quitting Backfires: How To Not Lose Your Retirement Vesting $$$

retirement vesting

This past week, I stumbled across an interesting new article about retirement vesting losses.  And it gave me some serious flashback to how I got close to losing $5,000.  I would really like for you not to run the same risk.  So let me explain…

A few months ago, I switched jobs for a number of reasons.  For one, my new role pays more and it was a nice career move on top of it.  And secondly, my commute is now half of what it used to be with a lot less traffic.  The gas money saved is awesome.  The time savings are priceless.

Related Post: How I Doubled My Income In 4 Years

While I was searching for a new role, career advancement, pay, commute, gas prices, as well as wear and tear on my car were on top of my list.  What was missing was my retirement vesting date.  And as it turns out, that should really have been #1 on the list.

What on earth is a retirement vesting date?

Your retirement vesting date is when the matching contributions your company adds to your retirement account actually become yours.  As much as I would like it all to be ours from the start, it is not.  Whatever is credited to your retirement account balance will take a few years to actually belong to you.

Let’s back up and see who is actually affected by this.  The Bureau of Labor Statistics put together a nice study in 2015.  As per this study, 51% of all employees have access to receive a match.  And the average 401(k) match offered to employees is 3.5%.  The detail breaks out in the following three groups:

  • 49% of employers offer a 0% match … 🙁
  • 41% match between 0-6% … much better
  • 10% offer a match exceeding 6% … awesome

No matter if your retirement vesting percentage is 1% or 10%+, 51% of us with a 401(k) plan need to take into consideration vesting periods when considering switching jobs, taking a break (i.e. for health or to have children), or retiring.  All three reasons could mean losing out on thousands of dollars.

If the IRS is to be trusted, companies implement a retirement vesting time period of 3-6 years.  Why?  Because they don’t want to hand free cash on top of the salary to employees who will leave the company rather sooner than later.

Look at the matching percentage as a bonus on top of your pay.  If you reward the company with your time and excellent work for a number of years, in turn the company will reward you with more cash for your retirement days.

So what is the problem?

If you, for whatever good reason, leave your company before you are fully vested, your company will take the matching dollars credited to your account back.  All of it!  No matter if it’s $1 or $10,000+, this is money you should be taking with you.

This “little bit” of oversight could have very likely cost me $5,000 a few months ago.  Thankfully, there is a silver lining to my story.  Meaning, I got lucky by leaving the company the same month I got vested.  But while time was on my side this time around, that doesn’t mean I’ll try my luck again.  And neither should you.

When thousands turn into tens of thousands!

The below three tables are a few examples of how much cash is truly at stake when switching jobs and saying goodbye to your company too soon.  Looking at what these few thousands could have turned into over 30 years should make you want to call your HR department this minute.  At (estimated) 8% investment returns:

  • $2,500 could turn into close to $25,000 over 30 years
  • Instead of leaving $5,000 behind like I almost did, pocket the $46,000+ in 30 years down the road.
  • $10,000 of company match could turn into close to $100,000 over 30 years.

retirement vesting tables $2,500

retirement vesting tables $5,000

retirement vesting tables $10,000

Neither one of these amounts is something I would want to leave on the table.  Which is why I called my HR representative and found out my new company’s vesting period is three years.  What is yours?  I will stay at my current company until 2020 at least.

Unless of course someone offers me $1M to work somewhere else.  The odds are slimmer than slim that this will ever happen, but one can hope 🙂 Which brings me to my last and final thought on this topic.  What reasons could there possibly be to justify leaving a match behind?

When even thousands don’t matter!

If there is anything I have learned in life, it is that there are always exceptions to the rule.  Simply because life is never a straight line.  If yours is, I’d like your playbook.  So what reasons could there possibly be to leave money on the table instead of staying a few more months at your current company?

Substantial Salary Increase

Leaving a few thousand dollars behind is well worth it if you are going to receive a substantial salary bump.  Let’s just say you’re currently making $50,000 per year and are offered an annual salary of $80,000, it is certainly worth thinking about taking it.  Especially if making more money will turn into a maxed out 401(k) account every year.

Family Emergency

Sometimes family emergencies come up.  And there is absolutely nothing you can do about it.  Life simply happens!  So if you end up losing a few thousand dollars because you have to take care of your child or parent, then so be it.  After all, is there a price tag you can put on family?

Toxic Work Environment

I have worked at five different companies in my lifetime so far and am more than familiar with toxic co-workers.  Some people just refuse to be happy.  And if they’re not happy, everyone around them has to be unhappy too.  Ridiculous!  If you find yourself in this type of position and it affects you emotionally, mentally, and possibly even physically, it might be time to go no matter what the cost.  Only you can be the judge of that.

Can you think of any other reason which would make you leave retirement vesting cash behind?  Go ahead and share them in the comments!

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9 thoughts on “When Quitting Backfires: How To Not Lose Your Retirement Vesting $$$

  1. Every company I’ve worked for had a different vesting system.

    My current company just updated to be 50% after 1 year and 100% after your second year with the company. It used to really confusing and weird. They updated lots of their benefits to be better and less confusing.

  2. When I quit my last job I was only 20% vested in my 3% employer match. I was two months shy of 40% vested, but I needed a change. It was hard not to linger another two months, but I’m glad I left when I did. Sadly I didn’t ask my new employer how long it takes to vest in the 401k match. The new job takes four years…we’ll see if I make it! 20 months in now!

    • Financial Muse says:

      Sometimes it’s best to leave. But if you can hang in there, your future self will be better off. But I get that sometimes it’s healthier to leave sooner.

  3. I’ve timed every job change to streamline vesting, bonuses, and other incentives. We work for money (well, most of us do). There is no need to leave it on the table for no reason. If you are going to leave it on the table, run a cost-benefit analysis first!

  4. It is so important to know what the status of your benefits package is when exploring opportunities. Knowing you won’t be fully vested and walking away from money that’s on the table is a negotiation point that should be used to get either a signing bonus to cover the lost unvested benefits, or to negotiate a higher salary or some other equivalent benefit.

    With respect to the retirement plan benefits, though, just a quick clarification: Participants who take a medical leave generally aren’t penalized for the period of leave for purposes of vesting in employer contributions. These rules are quite tricky, but just because someone takes family medical leave, it doesn’t necessarily mean they lose vesting service. A person may also quit working somewhere and later return to their original employer and still keep credit for their prior years of service for vesting purposes. There are specific rules regarding situations in which an employee leaves, then returns following a break in service. The break in service rules are also tricky.

    Regardless, employee contributions, such as 401(k) elective deferrals, are always 100% vested full stop. Here’s a link to an IRS Publication on the issue of calculating vesting years of service and what happens when there is a break in service… https://www.irs.gov/pub/irs-pdf/p6389.pdf

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