Episode #105: "Vesting Explained: How to Know What You Own and When"

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Transcript

Welcome And Show Setup

Speaker 0:01

Welcome to the Physical Physical Podcast. Join us here to week is Risa Town with the founder of Alchemy Wealth Management and author of your physical physical, Ryan Nelson. Tune in to gain valuable insights and practical tips as we simplify complex financial concepts into digestible lessons. From budgeting to retirement planning, this podcast is your go-to resource for mastering financial literacy.

Introducing Vesting And Why It Matters

Aaron Hoisington 0:33

Welcome everybody, and thank you so much for listening to this episode of the Physical Physical Podcast. We are here, myself, Aaron Hoysington, sitting next to my uh good pal Ryan Nelson, founder of Alchemy Wealth Management, and uh one of our uh one of our many dedicated listeners. I don't know about you, Ryan. Do you listen to the podcast every week? Every week. Yeah, me too. Me too. I do. I have it at the end. Oh, that's where our two listeners get. It's funny that we're I'm like looking, I'm like, cool, Sparks. That's me. Reno? It's probably him. Kind of thing. So uh but then the rest are overseas. Exactly. The rest I I have no idea. I asked my friends and they're like, You have a podcast? And I'm like, oh, thanks, guys. But uh no, really shout out to the listeners. Appreciate you guys for sure um checking us out there, looking forward to the future future growth of this podcast and what we can uh bring to the world. But uh today, Ryan, let's let's talk about a topic. Um it's called vesting or to vest. I don't know exactly how the best term for it um is, but uh, you know, recently on an episode, I think it was episode 101, actually, we we kind of touched on vesting here and uh kind of made a couple of references to it. And at the time I was like, hey, that's actually be a good one we could touch on just to see to make sure everybody knows what it is, because it's maybe one of those terms like we've seen many times in the past of where it gets thrown around, gets talked about, but really how is it applicable and what is important to kind of be aware of and look for it and how important it is to be knowledgeable about this. So hoping uh you can uh bring that to the table here, Ryan. And uh if not, then I guess we'll just end the episode here. So uh what do you what do you got?

Ryan Nelson 2:04

Yeah, let's move into that personal section.

unknown 2:06

Yeah.

Where Vesting Shows Up In Compensation

Common Vesting Schedules Explained

Key Dates, Service Rules, And Forfeiture

Ryan Nelson 2:07

Thanks, everybody. Yeah, let's vest. Yeah, let's vest. Uh yeah, so vesting it's the process of basically um earning the ownership rights to a employer-provided benefit over time. So, what that means is you can think of it almost as converting a promise into a guarantee. So your employer may say, Hey, I'm gonna give you whatever, $10,000 and it will invest in two years. What that means is you don't really have that two, that $10,000 now. Two years from now, it will convert kind of from that promise into that guarantee, and now that $10,000 is yours. So high level, that's sort of what it is. Um, you know, as we'll so like where where would we see this? So oftentimes we'll see it in a $401 or a 403B. It could be with the employer match or some sort of profit sharing. Um, also, sometimes companies will do it with their equity, so they'll give you some sort of stock options or RSUs, and there'll be a vesting schedule that comes along with those. And so what that means is, you know, maybe I'm contributing in my 401k, my employer gives me some sort of profit sharing, and they'll say, hey, you know, again, this $10,000 we're giving you, it's not yours immediately today, but it will be yours in a year or two years or three years. And you can see how they might use this as like an employee retention strategy. Sure. So now if I'm promised this $10,000, it's like, well, am I gonna leave and go find a new job? I don't know. I kind of want that $10,000. Maybe I'll stick around, right? And with some of these tech companies, those numbers get very, very, very big. It can easily get into the seven figures. So if you have seven figure seven figures, maybe a million dollars on the line, you may not leave to go to a new company. You may say, I'm gonna stick around and wait for this million dollars to vest. Yeah. Um, so that's where you see it. Um, one thing is you start thinking about your 401k. I see this all the time. The money you put into your plan, that's always yours. Okay. It's gonna be vested immediately. No matter what, the money you put in, always yours. This is really talking about employer's money when it goes in. How does it become yours? So there's a few different common vesting schedules they could use. So as the employer puts money into your account for you, there could be immediate vesting. That's actually the most common, at least most common that I've seen. So when they put money into the 401k, it's just all yours. If you leave the next day, that money's still yours. So that would just be immediate vesting. When they put it in, it's immediately yours. You don't even have to wait at all. There'd also be a cliff, what we call cliff vesting. And so that would mean you'd get none of this until you hit this cliff date. So if there's a three-year cliff, again with this $10,000 example, if my employer gave me $10,000 with a three-year cliff, I would get nothing if I left after one year, nothing if I left after two years, nothing if I left after two years and 11 months, but I get all $10,000 at 36 months at three, three years. So that'd be the cliff structure, and it could be three years, could be two years, right? There's different cliffs it could be. Then there's the graded. This one's fairly common as well. So if I got say $10,000 over five years, graded over five years, where I get 20% a year for five years. So now I would get $2,000 after year one, two more thousand after year two, two more thousand after year three. So if I were to leave after say year four, I would have vet eight thousand of the ten thousand would have vested. I wouldn't have gotten the final sort of vesting period, but four of the periods would have happened. So I would have got eight thousand of my ten thousand total. If I leave after year one, I would have got two thousand of my ten thousand. So that's a graded, um, a graded vesting schedule. And then there's also a hybrid vesting schedule where there could be like a short cliff plus graded afterwards. So it might say, hey, like uh a one-year cliff with a three-year graded or something. So maybe um you have to work there at least a year to get any of it, but then after that, it's gonna be graded, or maybe you have to be there for three years to get any of it, but then it grades over five years or seven years. Um, so there's gonna be the main ways that the employer may um set up the vesting schedule to incentivize you to stick around. And so, as the employee, what you want to be aware of is what is the ving start date. So if there's gonna be a timer, right? Like uh if you're waiting for a three-year window or a 10-year or like a five-year window, when does this window start? Right. So you definitely want to know when it starts. Also, when does it like come due? So when is the cliff coming due? Or when like what are what is the date at which the funds do become mine, right? So those would be things you'd want to know and have um have documented. Um, you'd want to know what your like, is there a continuous service requirement? So if you work for a company, let's say there's a a five-year vesting requirement, you work for a company for two years, you leave, you come back 20 years later, you work for another three years. Are you vested? I should know. You're gonna want to know uh and vice versa. There'd be some companies that say yes, you'd be invested. Some companies would say no, you're not invested. So it's just you just want to do your due diligence there. Um what happens if you do leave early? So, how what are the what we'd call forfeiture rules? What are the like how does that actually work? Um, and is there any window post-termination to like exercise some of these like stock options and stuff? So those would be things you'd want to be working through with your employee, employer, and start gaining an understanding of. And so why all this matters is you know, again, I I mentioned this example before. These some of these tech executives, they might have seven-figure balances waiting to be vested. You know, if if it quite literally, you you know, maybe you're sitting here waiting for a million dollars to get vested, it vests next week, you get a job offer today, should you leave today?

Aaron Hoisington 7:56

It depends on what they're offering. Yeah, yeah, yeah, yeah, right. Definitely. Uh, but you might want to try to wait a week. Hey, right. Yeah. I'm gonna have an eight-day negotiation. Yeah.

Strategy Around Job Changes And Offers

Ryan Nelson 8:06

Um, so definitely you're gonna want to know when these vests, and as you're making these transitions from companies to companies, like you want to be strategic with it. It doesn't mean that you need to be locked into that company forever because most of these companies that have vesting schedules, it's kind of this ongoing thing. So they might give you a bonus every year that's on like a four-year vesting schedule. So it never comes due because every year you're restarting a new clock, restarting a new clock, right? So it may never hit where you're like, oh, this is never gonna work out perfectly where there's ever a quote unquote good time to leave, but certainly you don't want to leave if you you know, maybe you want to push it off a little bit if you're about to get vested with a new kind of tranche next month or something. Yep. Um, so knowing those dates is important. Also, we talked a few episodes ago about like public employees and just about how important it was to understand your total compensation package. Well, this is part of your total compensation package. And as you're evaluating opportunities, maybe you're thinking about going to the public sector or maybe you're thinking about going taking a new job. The only way to be able to evaluate apples to apples is to have a good understanding of where you're at now. How much money do you actually are you actually gonna make by staying at this company? And it's not only what your salary is, it's what's coming due to be vested, right? So having that good understanding of your total comp package, which is gonna include how and when this these things vest. And I'll tell you, it's it's not too uncommon for somebody to come to me and say, you know, hey, I want to roll over this old retirement account, it's got like 80 grand. And then we go to roll it over, and it's like, no, they say, no, you actually only have 40 grand, this other 40,000 isn't vested. Oh, right. And so that's a good example of somebody who isn't quite aware of what money is theirs and what money isn't theirs, right? So you want to know these dates and familiarize yourself with them so you can have a good understanding and you can just manage your finances appropriately. Um another thing to just know it would be or to look into would be like what if you get laid off? Are there different tur are there different terms if if the employment ends due to their choice as opposed to your choice, um which can make a difference?

Aaron Hoisington 10:12

So just sorry, just a quick question here. As far as I it's probably not the right time for this, it just came to my mind, so I'm just gonna say it though. But do you know where the term vesting comes from?

Ryan Nelson 10:22

Like no, I don't. Is it is it no, I don't I was just curious. Like I don't either. So the root is probably something to do, like investing. Vesting. I'm assuming the Latin root is something to do with that. Yeah. Um yeah, good puzzling work.

Aaron Hoisington 10:37

Yeah, anyway, I just it literally came to my mind and I I couldn't couldn't hold it in. So uh anyway, thank you.

Ryan Nelson 10:41

I I do not know, but I wouldn't be surprised if it's something with the the root.

Aaron Hoisington 10:44

Uh that's certainly not my specialty. Sure. Uh you throw out some Latin there, that's kind of cool. Yeah, yeah.

Ryan Nelson 10:49

It's probably not even a Latin word. I don't know. I don't know.

Speaker 1 10:51

Anyway, sorry, okay, cool.

Documents To Request And Track

Etymology Detour And Listener Invite

Ryan Nelson 10:53

Um but yeah, so so if you're like, okay, you're you're thinking about this, you're like, oh, that makes sense. I think I've heard it my work. Maybe we have some vesting schedules. I've heard something about my you know, stock options or my bonus. I don't know if I do have act, you know, I've I know they put money in my 401k. I don't know if I have access to all that or if some of it's still there. So if I have to be there a certain amount of time, you know, one of your go-to moves would be go to talk to your HR. You can ask for what's called your summary plan description. So if you're in a 401k, there's what's called an SPD summary plan description. That's gonna give you the it's gonna give you a summary of your plan. And uh so then you can see like, oh, what's the ving schedule? Is there a ving schedule? What is it? Is it immediate? And I get my funds immediately, or is it a cliff, or how is it set up? So you can start to get an idea. Um, or if you have like stock options, you could look at get ask for your equity grant agreement. So those would be two documents you might want to ask your HR department for. And then again, document this. So write down what your start date was, what your cliff date was, maybe put it in the calendar, right? And maybe put some reminders in the calendars before those dates. Um, and obviously, if you are considering leaving or changing careers or jobs, make sure you're calculating what the impact would be. And you might look at your 401k and be sort of internally thinking like that balance is all yours. You're gonna want to go calculate how much of that isn't vested or how much isn't gonna actually, you know, how much am I giving up to take this new job? Yep. Um, and then obviously when you're negotiating an offer, we talked about negotiating offers a few weeks ago. And, you know, these are things you can negotiate potentially. You can at least explore negotiating them and see if you could accelerate your vesting schedule and just yeah, see, see what options you have and what flexibility you have there. Um so I think the kind of key takeaways here is right, the vesting is that process is turning that promise into the real money that's yours. Um make sure you're tracking your dates, read those documents, so summary plan description if you're in a 401k. Um anytime you're gonna make a big career move, make sure you're sort of evaluating these the both your current vesting and the future vesting as a piece of that. Because same thing, if if the if the new company is offering you um, you know, a hundred thousand dollar sign-in bonus, but it vs over a five-year window, well, okay. I don't know if it's fair to you like just to realize that's gonna be over a five-year window. Maybe it's more, you know, just yeah, it should be part of your consideration, right? Yeah, um, and then some of these can have big tax implications, especially with like the stock options. Um, so make sure you're evaluating the stock implications of exercising these. Um yeah, in in in total, yeah.

Aaron Hoisington 13:26

Yeah, and this is this is awesome. This really breaks this down nicely. And just from a personal standpoint, I know that like recently my wife got a new job, and one of the options or one of the things that she's like, oh, it this this vests over, I think it was a three-year period is what it was. And I really I'm gonna have to we're now now that I have this information, I'm gonna go back and sit down and be like, cool, could we get a copy of this uh summary plan description and like these different things? Because I'm I'm sure she has it too. But yeah, yeah. I'd be curious because like it is kind of interesting to think of if you have a three-year, you know, say you, you know, after every year you get a you know, 33%, or I don't know exactly the numbers, but it would be kind of cool to set that date on a calendar and be like, hey, I just vested 33%, or I'm fully vested. Like you never hear about anybody having a vesting party. Yeah, I think it'd be a you know, it'd relatively I've seen party enough. Yeah, exactly. So um the other piece of it that you hit too harkens back to that negotiating one of hey, if you're gonna leave, you know, think about this strategically, but also like you could use that as like, hey, I'm I'm a I'm next year I'm gonna be vested, you know, I'm gonna get a for easy math, $10,000 in through this. Like, can you guys replace that money that I'm gonna be losing from going here? And so like using that and coming with like the the actual numbers and everything too is a very, I think, you know, logical thing to bring to the table.

Ryan Nelson 14:45

Yep. Absolutely. Yeah, this is my total. If I stay another 12 months in my current business, this is how much money I'll make. It's my salary, all my vesting, everything. If I stay another 12 months in my company, this is how much I'll make. Can you match that? Yeah, exactly. Yeah, definitely. Yeah, exactly. So so I just looked this up. So what do you think the the So the word vesting? Uh-huh. I was right, it does come from a Latin word vestire, or I don't know how to speak. Of course. What do you think that means?

Aaron Hoisington 15:12

Vestire. Um to become whole. Ooh, I like that. Good guess. Yeah, good guess. To clothe. To clothe. Okay. Okay.

Ryan Nelson 15:24

Yep. All right. Well, it really it really paints a picture there. Which is interesting because Invest also has that same root, like I said, but it has the the prefix in before it, uh, which is something to do with clothing. Okay. Well huh. Yeah.

Aaron Hoisington 15:42

That really confused. Yeah, no, no, now it really clears it up there. Yeah. Hopefully, everybody out there, if you uh if you know exactly, like maybe that was uh you have a better definition than uh than that that one, please uh please let us know. Email us at podcast at alchemywealth.com or uh just let us know. Send us a text because I I'm super curious now. Like I love looking, I don't know if you I I love looking up roots of words too. And it's funny, uh uh my father tells the story about how he his favorite class that he ever took, like in college, high school, anything, was a Latin class. He took it and he was like, Once you learn where the roots of words come from, oh yeah, he's like you can puzzle out the meanings of almost everything. And I was like, Oh, that's really cool. Yeah, it makes sense. That didn't help. Yeah, yeah.

Ryan Nelson 16:28

So it says in so invest for an example, it says in a financial context, it came to mean clothing, clothing capital with a new form, such as putting it into a stock or business. Okay. So it's like taking your capital, clothing it into a new form. So you're taking cash, clothing it into a stock. I don't know. I'm grasping in stries here. Yeah. Yeah.

Break And Transition

Aaron Hoisington 16:49

But awesome. We'll hope everybody learns something there as far as vesting. Uh, and we'll go ahead and uh take a quick pause here, be back on the other side of this. Uh, everybody hang tight.

Speaker 16:58

And now to put the personal in personal finance.

Aaron Hoisington 17:04

Welcome back, everybody, to this side of the physical physical. Thanks for hanging tight with us there. And uh, Ryan, today we're gonna I once almost every one of these questions, I really don't know which way they're gonna go when I ask you them. So I'm I'm curious about this one here. So yeah, um, what is your favorite video game, Mr. Nelson? That's a great question. Thank you. Those are the only kind I have. Yeah, there you go.

Ryan Nelson 17:27

Uh guess uh I'll I'll turn this into trivia for sure. Guess what what do you think the last video game console I owned was?

Aaron Hoisington 17:36

Uh probably a Super Nintendo. Very good guess. I think because I've played it at your house. Yeah. And and NBA Jam. Oh, I remember. That's my favorite video game. Yeah, I didn't even think about that one, but yeah. I remember how good you were at that frustratingly good.

Ryan Nelson 17:53

Yeah, so I guess my point, but my brother had uh Xbox growing up when I was in like high school and stuff, but I haven't really had a video. I mean, I obviously I could play his whenever I wanted, but I really haven't played video games consistently since I guess high school. So sure it's been I don't know that I have a favorite. Uh, but certainly growing up, yeah, NBA Jam was definitely my favorite. It still has a uh soft spot in my heart. Um I know Vinny's a listener and he's uh he he he loves a good game of NBA Jam. Yeah, he's he's got quite the record against you too. Uh but yeah, so yeah, I like that. I'll go with NBA Jam. That probably is I it wasn't top of mind for me. Um, but uh now that you say that, I think that probably is most definitely my my favorite. What about you?

Aaron Hoisington 18:31

No, that's funny. I was like thinking and I was like, that's the only video game that I've ever seen Ryan play, or like have heard you talk about everything. So like I was like, that's gotta be the only answer. But that's funny. Um, it it's funny. I think about like video games growing up. I had an Xbox growing up, and I I'd I I just go through stages and spurts of these things. Like when I lived uh with my old roommate before I met my wife, like him and I would play a lot of Call of Duty and certain things, and like then I kind of got bored of that, and then my wife doesn't really like video games, and I was like, Okay, cool, well I'll give this up for her, like no question. And then I was like, Oh, I want to kind of you know talk to my friends about and certain things, and so my one of my friends gave me his PlayStation 4, and I was like, hey man, he's like, You you could I have a PlayStation 5 now, but like you I'm not using this you want? I was like, heck yeah, I just couldn't get into it, I just really couldn't get into it. And so I I haven't really played video games in probably years, but I used to really like NCAA football on Xbox before they discontinued it. I that was probably my favorite game growing up. I had like dynasties and I'd be recruiting people and doing all sorts of stuff there too.

Ryan Nelson 19:39

So I remember playing FIFA. Oh yeah. So soccer on uh Xbox, that was fun. Yeah, FIFA was Madden was fun, and that was fun too.

Closing, Contact Info, And Disclaimers

Aaron Hoisington 19:46

Yeah, but I just nothing like NBA Jam. Nothing like that, nothing like NBA Jam. I remember I I vividly remember hanging out in your basement and you had that that big TV and you had it hooked up there, and uh uh we were playing, and I was up by like eight with like a minute left, and I was like, I got him. I lost. Like uh you hit like three straight threes, and I was like, hmm, I'm going home. Scotty Pippen, baby. Yeah, anyway, awesome. Love it, love it, Ryan. Uh, hopefully turn it over to the listeners. What's your favorite video game? If you're a gamer, what is it? Is it you know a computer game, you know, that's something out of the box? Like uh let us know. Let us know what you uh what you guys prefer there. And uh um as always, thanks everyone for listening. These drop every Tuesday. We'd love uh love for you guys to send us a question. Let us know that you're listening or like it or hate it, whatever it is, we'll take all opinions. And uh Ryan, uh, why don't you close us down here, my man? As always, stay the course.

Speaker 20:40

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find the channel. For more resources, you can visit Alchemy Wealth Management's website at www.alchemywealth.com or find your physical physical book on Amazon. We'd be remiss if we didn't mention the personal finances just now. First of all, please don't take anything we say as advised. The pre-fitting content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor should it be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.