Common Money Mistakes Lawyers Make
As a lawyer, you spend your career climbing the ladder from first-year associate to (hopefully) equity partner. But have you spent enough time thinking about life after the law? Are you taking a proactive approach to retirement planning? Here are some common retirement planning mistakes that lawyers often experience.
Starting too late
As a lawyer, you have a limited number of years to maximize your savings. The longer you wait to start planning the more pressure you will put on yourself late in your career.
If you’re an Associate, start by taking advantage of the retirement plans your firm makes available to you. Set a goal and timetable for maxing out those contributions. If you’re further along in your career, get some help to figure out how much you need to save between now and your ideal retirement age to sustain your desired lifestyle. If that number isn’t realistic, solve for a sustainable spending number that ensures you won’t run out of money. Make the lifestyle adjustments over time to hit that spending number by the time you reach retirement age.
Focusing only on your portfolio
Your investment portfolio is a critically important component of your retirement, but it’s not enough to give you complete retirement confidence. You might say, “I’ve got $X in my portfolio, I’ll be fine.” However, without a clear handle on other key data, you have no idea whether that will be enough.
You need to build a set of retirement planning assumptions that can project how long your money will last. Consider the following factors:
- How long you will work? – This factor can vary greatly for lawyers, depending on your partnership agreement. If you have mandatory retirement you may have very little control over how long you work. Other firms allow partners to work for as long as they are able. The impact is enormous since working 1-2 more years and not tapping your portfolio can significantly change the likelihood of your money lasting.
- How much you spend? –You would think everyone would know their monthly spending rate. However, as lawyers advance up the ranks, they often lose track of their monthly cash burn. You can’t know how large your portfolio needs to be at retirement without knowing what it costs to support your lifestyle.
There are other assumptions that need to be examined in projecting how long your money will last, but these two are a great starting point.
Relying only on your 401(k)
Law firms do a good job of offering firm-sponsored retirement plans and lawyers often do a good job of maxing out their contributions to these plans. While these firm-sponsored plans are great savings vehicles there is only so much you can save into these plans due to contribution limits. Many times, the combined savings into these plans is not enough to fully fund your retirement. Depending on your spending levels your retirement plan savings may only fund a fraction of your retirement.
That’s why lawyers should figure out the annual after-tax savings needed to give themselves a high probability of a successful retirement. This is savings to a taxable investment account above and beyond your firm-sponsored plans. A financial planner can help you figure out what that number should be and help you build a plan to hit the target.
As a lawyer, you like to plan and prepare. The key question is, are you as well-prepared for retirement as you are for your next big client meeting? Hopefully, these tips will help you be more well-prepared.
Justin Peacock, MBA, CFP® is an Owner and Wealth Manager at BDF. He works closely with clients to design wealth management plans that take into account the full spectrum of their career and personal concerns. Justin graduated from Illinois State University with a B.S. in Mass Communication and earned his MBA from Northwestern University’s J.L. Kellogg School of Business.