“I recently moved into a principal role at my firm, and part of my compensation now includes carried interest in our newest fund. The fund size is about $800 million, and my share of the carry is small but meaningful if the fund performs well. The vesting schedule is four years. Payouts are years away, and I’m trying to understand how to plan around it.“
Carried interest creates one of the trickiest planning challenges for principals, partners, and anyone whose compensation is tied to fund performance. The upside can be significant, but the uncertainty is equally large. You have a potential future lump sum or multi-year stream of cash flows that could materially affect your long-term finances, but there is no guarantee of anything.
Below is how I encourage clients to think about it.
Carried interest is not guaranteed income
Your instinct is right. Carry is not something you can plan future expenses around, at least not today. It is simply a contractual right to share in profits if the fund performs well. Vesting schedules are designed to keep you tied to the team, which is why firms use carry as a retention tool.
Over the past couple of years we have also seen more movement within the industry. Even with carry outstanding, professionals are switching firms when they believe the probability of payout at their current firm is declining. So the “golden handcuffs” are not as strong as they used to be.
Your four year vesting schedule is typical. The first meaningful payout is likely seven to fifteen years away, depending on the fund strategy, realizations, and liquidity events. By then you will almost certainly meet long-term capital gains treatment, which is a real benefit from a tax perspective.
Step 1: Build a base plan that assumes zero carried interest
The foundation of your financial plan should not rely on carry at all. A good starting point is to model cash flow, retirement timing, college spending, and long-term savings on salary and bonus only.
Ask one simple question:
If I never receive one dollar of carry, do I still meet the goals that matter?
If the answer is no, the first step is to adjust savings and baseline planning so the answer becomes yes. That ensures your core financial life is not dependent on a highly uncertain future payout.
Step 2: Add “scenarios” based on potential carry outcomes
Once you have a stable base plan, create two additional layers:
Scenario A
The minimum level of carry that would meaningfully improve your financial life. Often this includes goals like
• a vacation home
• accelerated mortgage payoff
• early retirement
• more generous family giving
Scenario B
The higher end of the potential payout, where you would consider larger lifestyle changes or multi-generational planning.
This structure allows you to understand how different levels of carry translate into actual financial decisions rather than vague optimism.
As early distributions arrive and the certainty of additional payouts increases, you can begin to move from the base plan toward Scenario A or B with more confidence.
Step 3: Recognize the unique concentration risk in carried interest
Carried interest creates a rare form of concentration risk. It is not like owning too much of one stock in your portfolio. Here, your human capital and your financial capital depend on the same underlying outcome.
If the fund struggles
• your current career prospects may weaken
• the value of your future carry declines
• both sources of risk move in the same direction
That correlation is what makes planning so difficult.
To balance this, you may want to increase the stability of the rest of your financial life. For many people this means
• a little more fixed income
• more liquidity
• reducing other concentrated exposures
• being conservative with guaranteed expenses
You already have significant positive long-tail upside embedded in your compensation. It can make sense to offset that with a more stable investment posture elsewhere.
Carried interest is a powerful wealth-building tool, but it is also one of the most uncertain forms of compensation. Plan your core financial life as if you will receive none of it. Build scenarios for how to use it if and when it arrives. And recognize the concentration risk that comes from tying your career and financial future to the same fund outcomes.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on carried interest planning, executive compensation, and managing uncertainty in long-term wealth strategies, listen to the full episode here.