Advice on how to cross the difficult chasm between knowing what funds you need for retirement and actually getting there.
The opening scenes of the 1980s TV show LA Law showed the body of name partner Norman Chaney, firmly in the grips of rigor mortis, being wheeled away while up-and-coming junior partners fought over his corner office. It was a Monday morning, and poor Chaney, although well on in years, had been working over the weekend in the un-air-conditioned building when he died of a heart attack.
This probably isn't your idea of the perfect way to end your career trajectory. But what is your strategy for retiring from practice while you can still enjoy life? Whether you are young or not so young, you want to set out now on the path to ensuring your future retirement security. (And if you are old enough to remember the fictional law firm McKenzie, Brackman, Chaney and Kuzak, you should already be well on your way to putting together that security.)
In his excellent feature article in this month's Law Practice (see That Magic Number), John Sterba reveals rules of thumb for determining "the number" that, once in the bank—or more properly, in mutual funds or other investment vehicles—will allow you to retire with confidence that your income won't run out before you do. However, determining your desired number and actually reaching it are two different matters. In other words, for many lawyers, especially those whose firms don't provide retirement plans, there is a wide and difficult-to-cross chasm to traverse before one manages to amass sufficient assets to create an income stream that will allow for a comfortable retirement. Many lawyers never manage to cross that chasm.
The good news is that there is a road map of sorts in the book Real Life Financial Planning for Young Lawyers by Thomas A. Haunty and Todd D. Bramson (Aspatore, 2006). Haunty and Bramson are both certified financial planners who specialize in helping lawyers reach their financial goals. Their book offers invaluable advice on how to understand the mistakes that many lawyers make in failing to reach long-term financial goals. So, giving due credit to Haunty and Bramson, let's hit the highlights of their excellent book to help you devise a strategy to make sure you get to the retirement number you want.
Barriers to Reaching Retirement Security
To begin, Haunty and Bramson set forth the reasons why they believe that many lawyers are never able to amass sufficient investments to guarantee security in retirement. They refer to these obstacles as "Barriers to Lawyers' Ability to Build Wealth." Many of you will immediately recognize these barriers as problems you face every day. They include the following.
- Lack of time. Lawyers are usually smart people who can quickly master large amounts of information when needed for a case. That being said, most lawyers are either unable or unwilling to set aside the time to do the homework necessary to understand and evaluate all the various savings and investment vehicles that are available to them.
- Procrastination. All of us have, at different times, put off doing things that we know we should do. But time is the most effective tool you can have when you wish to see savings grow. As Haunty and Bramson point out, procrastination in putting a retirement plan into place has the effect of stealing the time over which the money saved would have the opportunity to compound. They cite a couple of reasons for lawyers' delay in setting up and funding appropriate retirement accounts. The first is preoccupation with paying off student loans before setting aside retirement funds that can grow over the life of the lawyer's practice. The second reason is "investment" (read overspending) in the trappings of career, such as clothes, cars, office furnishings and houses. As they correctly note, "investment" in anything that doesn't produce a return isn't an investment at all—it's an expense.
- There's a well-known joke among women that the more lost a man is, the more unwilling he is to stop and ask for directions. In like vein, Haunty and Bramson say that because we lawyers generally are smart, we often overestimate our own ability to make the best decisions regarding retirement savings. Moreover, we are often unwilling to hire someone to help us figure it out (just as we are often unwilling to hire consultants to configure and train us in how to use new software and other efficiency-enhancing tools).
- Deficit spending. Many lawyers fail to budget, whether at work or at home, which leads to a tendency to spend whatever is available. This results in lawyers adjusting their lifestyles upward to meet their incomes, after which they don't see how they can "afford" to save for retirement. The authors call this "living into the image" of being a lawyer.
- Disorganization. Again, Haunty and Bramson reveal that they know lawyers pretty well when they point out that, on the whole, we don't operate in ways that facilitate a secure retirement. For one thing, wealth building is a low priority for most lawyers, trailing far behind winning the ongoing case or hanging onto that all-important client. For another, many lawyers have poor filing systems, particularly when it comes to organizing and storing personal financial information. This means we aren't able to put our hands easily on pertinent information when it's needed for decision making. This leads to missed opportunities to save or to profit from good investments—which in turn leads to stress and loss of momentum in wealth building. In addition, in Haunty and Bramson's view, most lawyers react to whatever comes their way rather than seeking out appropriate opportunities to save and invest. Often they overlook the need for diversification, tending to have most of their assets tied up in a few illiquid assets, such as their practices, office buildings and homes. In the event of problems, they are then forced to sell off these illiquid assets, usually at inopportune times and often at the bottom of the market.
- Lack of an overall wealth-building plan. Lastly, the authors put the nail in the coffin, so to speak, when they point out that most lawyers "plan by crisis and not by design." Fortunately, they then go on to provide simple, easy-to-understand steps for busy lawyers who want to build wealth, for retirement or any other purpose.
Four Levels of Wealth Building
After praising the virtues of good personal organization and budgeting, Haunty and Bramson outline what they call the four levels of wealth building and explain the steps for moving through each level.
- Protection foundation. The first step to building and securing wealth for retirement is to take stock of what you have; carefully evaluate the ways in which it is vulnerable to loss (whether it's your personal possessions to fire or flood, or the value of your practice to a partner's malpractice); and then purchase adequate insurance to protect you from those losses. This level means that you safeguard what you have and will acquire in the future—but it requires that you periodically reassess your assets, your potential exposure and your coverage, and act accordingly. This is called the "protection foundation" because, without this level securely in place, you won't have the necessary foundation to build wealth over time.
- Cash generation. This level is the one most of us think of when we think of planning for retirement. This is the level at which you save and invest, but it's also the point at which you think about reducing debt, since doing so provides you with a guaranteed rate of return—the interest rate that you are eliminating. The cash generation stage is often hard for many lawyers (particularly those who have bought into all the high-style trappings of law as they are portrayed on TV). This is where living based on a budget, and well below your income, is very important.
- Growth accumulation. Once you've begun to accumulate some liquid assets, you are then in a position to take advantage of good financial opportunities when they come along. Growth accumulation refers to the stage at which you begin to balance risk against the possibility of long-term growth. In particular, you want to take advantage of all possible tax savings. The authors point out that tax-sheltered accounts such as IRAs and 401(k)s are usually fairly illiquid. Although you can't remove funds without paying taxes and, in most instances, penalties, these accounts allow you to increase the amount you save because you eliminate, at least for now, the taxes you would have paid on the funds, increasing what can be placed into the tax-sheltered account. And the earlier you start, the longer these funds can compound before you begin to draw from them for retirement living.
- Aggressive growth speculation. In this last level of wealth building, you want to risk only what you can afford to lose in exchange for the possibility of a huge gain. One way to think of it is going to a casino with $100 in your pocket to spend for the sake of entertainment. If you hit the jackpot, that's great. But it's also fine if you don't, as long as you quit when your $100 is gone. As the book points out, this stage is not for everyone, and if you start early and handle the other stages well, you won't even need to venture here.
So there you have it—a road map that will guide you across the chasm to a well-funded retirement. By following Haunty and Bramson's advice (and a good first stop on the road is purchasing their book), you can secure the dream of continuing to enjoy life and its comforts for many happy years after you retire from your practice.