Tank #1: Contribute up to your Retirement Match
Your company’s retirement matching program gives you free money as long as you participate. It’s an incentive for you to save. The amount and rules may vary, but it’s still free money if you do your part.
There are two parts to your retirement matching program – the match and the vesting schedule.
Part 1: The Match
With a match, your company will add money to your retirement account if you put your own money in first. Here’s how it works:
Let’s say your company matches 50% of the first 6% you contribute.
You contribute 6% of your paycheck to your retirement account (This is typically done online through the company that handles your retirement plan. Ask HR if you need help).
Your employer will contribute an additional 3% of their money to your retirement account (They contribute an additional 50% of your 6%, which is 3%).
In total, your retirement account will get 9%. 6% will come from your paycheck and 3% will come from your employer’s match.
Continue every month. Keep getting free money.
If you don’t contribute, your employer doesn’t contribute. It’s that simple. Your retirement matching program is a benefit from your employer. They want you to save for your retirement and are willing to help if you help yourself.
Part 2: Vesting Schedule
The second part of the matching program is the vesting schedule. Vesting tells you when the money your employer contributes is actually yours. Companies use vesting schedules to retain employees. Here’s how it works with the above example:
The 6% you contributed is 100% vested – it’s all yours at the moment you contribute and is now in your retirement savings account.
The 3% your employer contributed is on a vesting schedule that is either immediate, graded, or cliff.
If it’s immediate vesting, the 3% they contribute is all yours, immediately.
If it’s graded vesting, you get the 3% over a certain period of time. For example, if it’s 4-year graded, you get ownership of a quarter of their contribution each year for the first four years. After four years, it’s all yours, for all future years.
If it’s cliff vesting, you get the 3% after a certain period of time. For example, if it’s a 4-year cliff, you get everything they’ve contributed after you’ve completed four years of service. During the four years, the company puts their match in a side account and then gives you a lump sum at the end of four years.
If vesting is still a little hazy, don’t worry about it. You should contribute to the matching program regardless of the vesting schedule. All vesting means is that, if you leave your employer before the end of the vesting, you may be leaving some of their match behind. Don’t focus on that. Instead, focus on getting as much free money as you can. Contribute to the match.