Financial freedom. It's something everyone wants. As a lawyer, what should you be thinking about and doing now to put yourself on the path to a secure retirement?

The answer is it depends. It depends on where you are in the arc of your career and how close you are to your retirement years. Here's a rundown of the top few items you should have on your financial checklist, based on your career stage.

Associates

Law school isn't free, so many young lawyers start their careers carrying significant debt. The best thing you can do early in your career is to pay down that debt as quickly as feasible. Interest rates have increased significantly over the last year, so if your loan has a variable interest rate, that debt has gotten more expensive. There are few guarantees in life, but think of paying down your law school debt as a guaranteed rate of return on the money you put toward exhausting that debt because you're paying that much less in interest costs.

Once you've gotten yourself on a consistent plan to pay down your debt, it's time to get serious about your firm-sponsored retirement plans. Big law firms typically do a great job of providing quality retirement plans. The power of compounding interest is most fully unleashed the more time you give it to work. Start contributing to your firm's 401(k) or other retirement plan as soon as you can.

Even if you are unable to max out your contributions, anything you can contribute will help. It's worth giving up a little extra spending money now so that you will have a larger retirement nest egg in the future. The earlier you start contributing, the more it will become your normal course of action.

Next, make sure to avoid falling into “the comparison trap.” When lawyers are just starting out their careers, everywhere they look they see people making a lot of money. Let's consider a third-year associate in her firm's M&A practice group. The partners she supports, the clients she serves and the investment bankers she collaborates with are all knocking down significant incomes, north of seven figures in many cases. It's very tempting to compare yourself to those professionals and to desire the lifestyle that their income levels afford them. Don't fall into this comparison trap! Exercise the discipline of living within your means early in your career, and it will serve you well as your career and income level advance.

Income Partners

Income partners live in a unique space in law firms. You've established yourself as a good lawyer, yet you still have more to prove. You have made the leap from associate, but you are not yet in the ranks of shareholder. As you continue to advance and prove your worth to your firm, you also need to be preparing yourself financially for when you become an equity partner.

As you've grown your career, hopefully you've also grown your retirement plan contributions and are now maxing them out. If not, you should prioritize this and adjust your budget as needed in order to max out these contributions.

Next, begin practicing some “lifestyle lag” where your spending increases lag your jumps in compensation. The good news is that, as lawyers advance their careers, their income typically advances in an up-and-to-the-right pattern. The bad news is that spending often advances in lockstep with comp. This makes it difficult to ever get much “financial white space” or breathing room.

A really simple way to create this white space is to practice an 80 percent rule. Instead of buying the most expensive house or car that you can possibly afford, consider buying 80 percent of that and saving the 20 percent. This will give you some cash cushion that will likely prove valuable once you become an equity partner and your cash flows become more uneven in a draw and distribution model. You also have to start making quarterly estimated tax payments, which can put a major strain on your cash flow in your early years as an equity partner. So, this lifestyle lag can prove very valuable by giving you a cash cushion to help you navigate these cash flow complexities.

Equity Partners

For equity partners, it's about maximizing your max income years. Depending on your firm's partnership agreement, you may be able to work as long as you want, or you may have some form of mandatory retirement. Either way, there is a finite number of years that you can occupy your senior partner seat and the comp that comes with that seat.

The first order of business for equity partners is to nail down your spending. As you advance your career and your compensation, it's easy to lose track of your spending. As long as there's more coming in than going out, it's tempting to not focus on it. However, this is a dangerous pattern. Your income stream is not a bottomless well that can never run dry. There is a point where your firm income will cease, and you will need your investments and retirement income to fund your desired lifestyle. Without a clear understanding of what it costs you to live the life you enjoy, it's impossible to figure out the required savings between now and retirement to sustain that lifestyle.

Speaking of savings, by now hopefully you've been maxing out your contributions to all your firm-sponsored retirement plans for many years. If you have multiple retirement plans, as many big firms do, those account values could easily be over seven figures. That's a lot of money, but is it enough?

Depending on your lifestyle, it may or may not be. You need to determine an annual after-tax savings goal that will give you a 90 percent-plus probability of a successful retirement. You will need some help to figure this out, using retirement planning software, but it's an incredibly helpful way to think about savings. In my experience, what works best for law firm partners is to determine the annual savings target and tie it to your partner's distribution cycle, so you have a preset amount from each distribution that you know is going toward savings in order to hit your goal. This disciplined approach will help you make the most of the rain you make and set you up to retire when and how you want.

Retirement planning can seem overwhelming, if you look too far into the future. Hopefully these tips give you some manageable action steps you can take now, at your current career stage, to make sure you are setting yourself up for a solid financial future.

 

Important Disclosure:

Investments involve risk and past performance may not be indicative of future results. Balasa Dinverno Foltz LLC (BDF) investment and wealth management strategy recommendations may not be profitable, suitable or equal historical performance. BDF's current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request.

 

Justin Peacock is an owner and wealth manager at BDF, a fee-only wealth management firm based near Chicago with assets under management in excess of $4 billion. BDF serves clients nationwide. Peacock leads the firm's attorney practice group and can be reached at [email protected].