This is the third installment in a series of blog posts on “The Big Five of Retirement Planning.” The “big five” are the five factors that will most profoundly impact how successful your retirement plan will be.
Today we will focus on factor #3 – How much you save.
To examine this point we have to start with a look at how lawyers create wealth in the first place. A real irony is that while lawyers provide a great service to their business owner clients by helping them negotiate a successful business sale, no such exit strategy option exists for lawyers. There is no market for law firms. Sure there are plenty of mergers in law firm land, with a new combination getting announced seemingly every month. However, these mergers do not create life-changing, retirement-funding liquidity for law firm partners. For lawyers, wealth creation is all about year-over-year compensation growth. It really comes down to “making rain while the sun shines.”
With that in mind, how should lawyers think about their saving habits? Let’s tackle this question based on career stage:
Paying off law school debt and buying your first house are often the primary goals in the early years. Once those goals have been achieved it’s time to turn your attention to the longer-term future. Retirement is likely decades away, so use that to your advantage. The power of compounding interest can be fully capitalized on the earlier you start saving. The best thing you can do in your early years is to start contributing to your firm-sponsored retirement plan, such as a 401(k). If your firm has some type of matching or profit sharing component, even better… that’s free money for you. If you’re not currently contributing to the plan you don’t have to start maxing out your contributions tomorrow. That’s unrealistic. Start by contributing, say 5% of your pay and set a goal for increasing that % each quarter. It won’t take long and you’ll be at the max contribution level.
By now hopefully you are maxing out your 401(k) contributions, so what else can you do? A couple of ideas:
1. College Savings – If you have young children set up a 529 college savings plan. The earlier you start the better and any little bit helps.
2. After-Tax Savings – As your compensation grows you can start stashing away part of your annual bonus to build up some after-tax savings. Opening a brokerage account and setting a goal of saving a certain percentage of your bonus will help you diversify the type of wealth you’re building. This extra savings may come in handy as well when it’s time to fund your capital buy-in when you make equity partner.
Assuming you’re already maxing out all firm-sponsored retirement plans, your focus needs to become after-tax savings. Tax-deferred retirement plans are very powerful savings tools; however they all have contribution limits. Depending on your lifestyle, those retirement plan contributions may not be enough to fund your desired lifestyle for potentially 30 years of retirement. You need to figure out the after-tax savings number that you need to be socking away to give yourself a 90% or better probability of a successful retirement. A “successful retirement” would be defined as living your desired lifestyle until age 90 without danger of running out of money.
So now what? As a practical step, ask yourself this question: On a scale of 1-10, how satisfied am I with my current savings strategy? If it’s not a 10, take some of these simple steps and put them into action.
Justin Peacock, MBA, CFP® is an Owner and Wealth Manager at BDF. In addition, he leads BDF’s Attorney Practice Group. This group is dedicated to providing financial planning and investment management services specifically tailored to addressing the distinct needs of lawyers. As practice group leader, Justin is responsible for the overall vision and strategy of the practice group and for developing customized solutions for BDF’s attorney clients. Justin graduated magna cum laude 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.