Lawyers Financial Freedom Checklist
Financial freedom. Everyone wants it. As a lawyer, what should you be doing now to achieve that freedom? It depends on where you are in your career and how close you are to retirement. Here are the top three saving strategies for attorneys you should have on your checklist, based on your career stage.
Law school isn’t free, so many young lawyers have significant debt.
- The best thing you can do early in your career is paying down that debt. There are few guarantees in life but paying down your law school loan guarantees your rate of return because you’re paying much less in interest costs.
- Once you’ve established a plan to knock out your loans it’s time to get serious about your firm-sponsored retirement plan(s). Start contributing to your firm’s 401(k) plan as soon as you can. If you can’t max out your contributions, anything you contribute will help. It’s worth giving up a little extra spending money now for a larger nest egg in the future. The earlier you start the more it will become a habit.
- Next, avoid “the comparison trap.” Don’t compare your lifestyle to the partners you support or your friends who earn a larger salary. This leads to a lack of contentment and over-spending. Have the discipline of living within your means now and it will serve you well as your career and income level advance.
You have made the leap from associate, but you are not yet in the ranks of shareholder. As you advance closer to the level of equity partner you also need to be preparing yourself financially for those new realities.
- By this point, hopefully, you are maxing out your 401k contributions. If not, prioritize this and adjust your budget as needed.
- Next, implement some “lifestyle lag” where your spending increases lag your jumps in compensation. As lawyers advance, their income typically advances in an up-and-to-the-right pattern. Unfortunately, spending usually advances in lockstep with comp. This makes it tough to establish financial breathing room. Instead of buying the most expensive house or car that you can possibly afford, consider buying 80% of that and saving 20%. This will give you some cash cushion which you’ll need once you become an equity partner and your cash flows become more uneven and you start making quarterly estimated tax payments.
Focus on maximizing your max income years. For most lawyers, there is a finite number of years that you can occupy your senior partner seat and the comp that comes with that.
- The first priority is to nail down your spending. Your income stream is not a bottomless well. There is a point where your firm income will cease, and your savings/retirement income must fund your lifestyle. You must know what your lifestyle costs in order to figure out the required savings to sustain it.
- You need to determine an annual after-tax savings goal that will give you a 90%+ probability of a successful retirement. You will need some help to figure this out, using retirement planning software. 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 know how much of each distribution will go towards savings. This 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 for your current career stage to set yourself up for a solid financial future.
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.