Over the past couple of years my firm has conducted over 200 interviews with the legal community in order to understand the key issues facing today's law firms and individual lawyers.

A hot-button issue that continues to come up is succession planning. Big and small firms alike are wrestling with this conundrum. A basic understanding of demographics explains why—the baby boomer generation is already in or rapidly approaching retirement age.

However, less than half of law firms are proactively working on the issue. According to the 2017 National Legal Sector Benchmark Survey by Cushman & Wakefield and ALM Legal Intelligence, only 47 percent of law firms have either a formal or informal succession plan.

When succession planning is discussed most attention is paid to two elements:

(1) Leadership Succession—How the firm will be led and managed into the future.

(2) Client Succession—How critical client relationships will be passed to the next generation.

Far less attention is paid to an extremely important component of executing a succession plan—retirement readiness.

The Problem

The reality is that, barring a mandatory retirement policy or health issue, partners will not retire unless they are highly confident that they won't run out of money. Much of this is driven by the way lawyers build wealth. Unlike their business owner clients, lawyers are not building equity value in a growing business. They have a capital account representing their paid-in capital, but those accounts typically grow at a very modest rate and the capital is simply paid back upon retirement. Lawyers will not have a large liquidity event to fund their retirement. As a result, wealth is created by year-over-year compensation growth. It's all about “making rain while the sun shines.”

This creates a challenge to the firm's succession plan. If partners are not retiring when they reach “retirement age,” it becomes difficult to keep the succession train moving in terms of leadership and client relationship transitions. The knock-on effect is that it becomes more difficult to retain next-generation talent eager to move into more senior roles within the firm.

To address this issue, firms and individual lawyers should focus on helping partners be more retirement ready from a financial perspective.

To their credit, law firms have traditionally done a nice job of providing quality firm-sponsored retirement plans such as 401(k) plans. In turn, lawyers have historically done a good job of saving to these qualified plans. It's not uncommon for attorneys' 401(k) account balances to be in the high six-figure or even seven-figure range. That's the good news.

The not-so-good news is that these qualified retirement plans all have something in common—contribution limits. Even if your firm has multiple qualified plans, the combined savings you are allowed to put away each year may not be enough to sustain your desired spending level for what could be 30+ years of retirement. I have yet to have a client say, “When I retire I am really looking forward to cutting my lifestyle by 20 percent.” No one does that. So, figuring out how to perpetuate your current lifestyle throughout retirement becomes paramount.

The Solution—Know the Number

“The Number” is the amount of after-tax savings you need to save each year between now and retirement in order to have a 90 percent+ probability of a successful retirement.

Sounds simple enough, right? So, how do you figure out what your number is? A few key data points that I call “the Big Five” of retirement planning are needed:

(1) How long you plan to work. Since lawyers' wealth is created through yearly compensation growth this assumption has an enormous impact. In my experience, clients are often shocked to see the difference working 1-2 extra years can make in the long-term success of their retirement plan.

(2) How much you spend. You need a clear understanding of your monthly burn rate and any “big ticket” expenses you anticipate in the future such as a second home or education expenses. In my experience, I've found that the more money clients make, the less likely they are to know how much they spend each month. Nailing down your spending figure is critical to calculating how much you need to be saving to sustain that spending level.

(3) How much you currently save. What are you currently saving to your firm-sponsored retirement plans or other vehicles such as IRAs and brokerage accounts?

(4) How hard your money works for you. None of us can control what the stock or bond markets will do. We can, however make some reasonable assumptions about potential future returns for a diversified portfolio based on historical averages.

(5) How long you live. In building financial plans for our clients, we typically run their plans out to age 90 or beyond. Since goal number one of retirement planning is don't run out of money, it's best to plan for living longer than you might assume.

Once you have a clear handle on these inputs there are a variety of tools to help you figure out your number. Of course there are a seemingly countless number of online retirement calculators that can help you get an idea of your retirement readiness. Another approach could be to work with your financial planner to build a comprehensive financial plan, including a detailed retirement projection. This exercise can help you land on a clear annual savings target that you need to shoot for in order to enjoy the retirement you've always envisioned.

In working with many lawyers over the years, we have found that giving lawyers a clear goal really helps drive behavior. I'm generalizing here, but many lawyers are competitive and highly motivated. Use that natural wiring to your advantage when it comes to setting and hitting an annual after-tax savings goal.

Not only will you enjoy greater peace of mind for your own retirement, but your firm will also benefit by being able to more effectively execute its succession plan.

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, MBA, CFP is an owner and wealth manager at BDF. He leads BDF's Attorney Practice Group, which is dedicated to providing financial planning and investment management services specifically tailored to addressing the distinct needs of lawyers. Justin graduated from Illinois State University and earned his MBA from Northwestern University's J.L. Kellogg School of Business. He can be reached at [email protected].