Retirement Benefits for Lawyers
I have the privilege of working with many law firm partners as clients. In my experience, law firms often have some of the best benefits for their partners and associates. I have also found that many times lawyers don’t take the time to fully comprehend all of their firm-provided benefits and how those benefits impact their overall financial life. Here are a couple of areas that lawyers should take time to fully understand and make sure these elements are incorporated into your overall financial plan.
Law firms are often at the leading edge when it comes to offering innovative, competitive retirement plan designs for their partners and staff. Essentially, every law firm offers the traditional 401(k) plan for its team members. However, many firms go beyond this by offering additional retirement plans that can help lawyers save significantly more towards retirement. One example, especially within Big Law, is the cash balance pension plan. One of this plan type’s advantages is that it offers potentially much higher annual contribution limits than the traditional 401(k) plan. Most firms will implement a plan like this in addition to the 401(k) plan, not as a replacement. The assets in the plan are held in a single account and managed by a professional money management firm. Each participant receives a statement showing their pro-rata ownership of the plan assets. Historically these plans were invested very conservatively with a heavy emphasis on bonds, however, more recently these plans are often invested in a more balanced approach such as 60% stocks and 40% bonds.
Cash balance plans are not solely for the largest firms. A recent trend I have been seeing is mid-sized and even smaller law firms implementing these cash balance plans as a way to not only save more for retirement but to compete for legal talent. Every firm culture and composition of the team is different, so those factors must be weighed to see if a cash balance plan makes sense for your firm or not. However, the concept of continually evaluating what types of plans are available beyond the traditional 401(k) is a smart move to make sure your firm stays competitive in the ever-evolving battle for talent.
Post Retirement Income
What happens to your partner income stream once you retire? Do you know? If not, you need to make sure you understand this fully and incorporate it into your retirement plan. Many law firms offer some type of post-retirement benefit that will pay a partner some percentage of your pre-retirement income for some number of years. The significance and details of these plans vary wildly from firm to firm; however, it is very common for some type of plan to exist. Making sure you understand how those cashflows work and that you have those estimates incorporated into your retirement plan projections are essential. These plans can really set you up for a comfortable, successful retirement, but make sure you understand all the nuances and requirements that you must meet in order to be eligible for the benefit. Often those requirements entail a certain number of years as a partner, a certain retirement age, and that you opt to take the benefit within a specified window.
These plans are usually a “non-qualified” plan, meaning it’s not guaranteed like a pension plan would be. You are essentially an unsecured creditor of the firm and the firm’s ability to make good on these payments will depend on the firm’s continued financial performance.
While the hours and demands of a life in the law can be challenging, fortunately, you are well compensated for those demands. One of the best ways you are compensated is in the innovative benefit plans your firm makes available to you. Make sure you are well-informed on these plans and that you are taking full advantage of them every step of the way and you will set yourself up for a wonderful life after the law.
Justin works closely with clients to design wealth management plans that take into account the full spectrum of their career and personal concerns with a specialization in advising law firm partners. Justin earned his MBA from Northwestern University’s J.L. Kellogg School of Business.