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February 05, 2021 Feature

Personal Financial Health

Cynthia Sharp
“Fortune favours the prepared mind”

Louis Pasteur

All too often, lawyers are so busy tending to the needs of others that their own lives (financial and otherwise) suffer. My purpose in writing this article is to provide guidance to those seeking to take charge of their own personal financial health.

By way of background, in 2009 (after thirty years in practice), I was able to sell my interest in the law firm and follow my dream of becoming a speaker, coach, and writer. It was not a matter of luck. Rather, it was a matter of planning, preparation, and execution on many levels.

While there are many paths to financial success, please consider the six steps and special considerations outlined below as you move forward to the next level in your financial growth.

Step 1. Assess Your Current Financial Health

Determine your net worth by gathering up all of your statements and entering the data onto a spreadsheet. Although it seems simple, the “leg work” requires an investment of a little time and effort. Please don’t let that be an obstacle to getting started. While you are at it, check your credit report for accuracy because approximately 20 percent of all reports have at least one error.

Step 2. Identify Values and Create a Financial Mission Statement

Create a personal or family financial mission statement, which will serve as a guiding light with respect to all future financial decisions. For example, some people want to own large homes and drive the latest model of luxury car, while others aspire to a lifestyle of three-day weekends spent hiking, canoeing, and exploring the outdoors—all on a shoestring budget. Everyone’s relationship with money is different.

If your finances are intertwined with someone else’s (such as a spouse or partner), it is recommended that you work together in creating the financial mission statement and subsequently participate in a regularly scheduled “business meeting” (at least quarterly) to discuss short- and long-term goals, savings, cash flow, and spending issues. Needless to say, complete candor with a partner about finances is a nonnegotiable prerequisite.

Step 3. Set Specific Financial Goals

Whether the objective is to fund retirement, get out of debt, buy a vacation home, or send the kids to college, it must be set forth in writing with specificity.

First, project the exact amount that you need. Second, determine the date by which you must accumulate the required resources. Third, establish benchmarks and concrete criteria so that you can measure your progress on a quarterly basis. Fourth, adjust along the way as necessary.

Step 4. Structure a Realistic Financial Plan

A thorough financial plan not only will address investment strategies but also will identify opportunities to minimize income tax liability, evaluate the need for life insurance, recommend asset preservation and income replacement strategies, outline estate and long-term-care planning strategies, and address repayment of outstanding debt where appropriate.

Because enjoying a comfortable retirement is one of the major goals of most, I have dedicated a section to this topic below.

Step 5. Execute the Terms of the Plan

For the most part, this is the savings phase, which requires diligence, discipline, and perseverance. It involves establishing a budget and sticking to it.

However, even though some develop a budget on paper, they may fail to develop a mindset of budgetary discipline and instead succumb to the whim of impulse spending. By being mindful as you make even small financial decisions or expenditures, you will be aware of the future financial consequences of current behavior and guide yourself accordingly.

Step 6. Monitor Investments/Reassess Positions

On a monthly basis, make sure that you are on track with respect to savings goals. An overall review of the financial plan and portfolio performance should be conducted at least annually. As time passes, our objectives evolve and risk tolerance usually decreases. For example, as we age, saving for retirement takes on even greater importance.

Special Considerations

Because of space limitations, I am unable to give the topic of financial health the detailed discussion it deserves. I have chosen to highlight three critical aspects—estate planning, preparing for retirement as well as law practice succession strategies—with the hope of motivating readers to take action steps in each arena.

Estate Planning—Critical Documents

Almost everyone over the age of 18 is advised to have in place basic estate planning documents including a last will and testament, power of attorney, and health care directive. Otherwise, in the event of the person’s death or disability, the survivors could be burdened with unnecessary court proceedings.

Because most estates are not subject to federal or state estate taxes, the focus in establishing a will is to achieve non-tax-based objectives, which include naming beneficiaries and designating an executor. If there are minors or incapacitated dependents, a guardian can be named and trusts can be set up as well. Another common concern is providing for a second spouse while protecting children born of a prior relationship.

Under a financial power of attorney (FPOA), an agent is designated to manage finances in the event of incapacity. A general durable power of attorney is the most common type of FPOA. The broad powers granted ensure that the agent can handle all financial matters. The document remains effective after the onset of a disability in light of the durability clause. Powers of attorney limited to certain transactions may also be executed.

A health care directive contains instructions to be followed if the individual cannot decide for themself regarding the types of medical care they wish to have administered. Under a health care power of attorney, the principal appoints an agent to make medical care decisions on their behalf in the event that they lose capacity to do so. The agent is bound by the terms of the living will but is empowered to make decisions for issues that aren’t addressed specifically in that document. A HIPAA health care release should also be included in the health care directive.

These additional considerations also need to be given attention:

  • The fiduciary appointed under the will and the power of attorney should be given the specific power to handle digital assets and other online affairs including social media accounts. Creating a spreadsheet with updated usernames and passwords will make the fiduciary’s job a lot easier.
  • Solo practitioners should have a written contingency plan designating a “competent attorney” to handle matters in the event of disability or death.
  • Note that the purchase of life insurance could be advisable in some circumstances. It can be an effective means to enhance an estate to ensure that all loved ones are provided for in the event of the death of the main income earner.
  • Proceeds from qualified plans and life insurance policies are not controlled by the will. Instead, the proceeds pass to the person named as beneficiary under a form provided by the plan or insurance company.

Planning for Retirement

Young attorneys who start planning for retirement TODAY will have a significantly more secure and comfortable retirement than those who wait until reaching senior status to begin this process. However, it’s never too late to get started. The question to address is how much do you need to begin saving on a monthly basis in order to create an asset base that will generate sufficient income to fund your post-retirement lifestyle?

Fortunately, online calculators are readily available to help with answers and guidance. One of my favorite resources is dinkytown.net, which I have relied upon frequently to help me with personal financial projections based upon assumptions entered. These assumptions include (1) projected income from any source including social security and existing investments such as stocks, bonds, and real estate; (2) age at which you expect or hope to retire; and (3) life expectancy. The various calculators allow you to determine the amount that must be saved on an annual basis preretirement to build the necessary asset base. You can also ascertain the rate at which to withdraw funds after retirement so that you don’t run out of money. The trick is to create a post-retirement budget now so that you can determine how much income you will need later.

The Basics of Social Security

Social Security retirement income is generally available to individuals who have reached age 62. Those opting for “early retirement” at age 62 will receive as much as 30 percent less per month, while people who retire after their “normal retirement date” (age 66) receive a “delayed retirement credit,” which stops accruing upon attaining age 70.

It is important to know that Social Security recipients earning income in addition to their benefits may suffer a reduction in the benefit amount if they are under normal retirement age. Social Security benefits may also be subject to taxation depending on the amount of other income being earned by the taxpayer. The rules are detailed in IRS Publication 915. Worksheets and examples are provided as well.

An estimate of benefits (based on different retirement dates) can be obtained by setting up a password-protected account at the website My Social Security. Individual earnings records are available as well and should be checked for accuracy.

The Power of Tax-Deferred Growth

Before putting money into accounts or investments that produce taxable earnings, I strongly recommend contributing the maximum amount permitted to tax-qualified plans. Under current law, taxpayers may contribute up to $6,000 annually ($7,000 after age 50) into an individual retirement account. Qualified plans established by employers can be quite attractive for both the law firm employer and the employee. Information about IRS rules governing retirement plans for small business can be found in IRS Publication 560. The contribution limit to 401(k) plans is $19,500 ($26,000 after age 50) each year.

If you have doubts about whether to go this route, consider the following scenario: An attorney begins making maximum contributions into her IRA at age 40, never misses a year, and never makes a withdrawal. The assumption is a 7 percent rate of return. At age 65, the IRA will have accumulated $432,947. If she had allocated the same amount to a taxable investment, the fund would be valued at $368,005. Not a bad nest egg.

Note that under the recently enacted SECURE Act, minimum required distributions from the IRA must begin once the account holder reaches their required beginning date (RBD), which is April 1 after the year they reach age 72.

Roth IRAs can present an attractive planning opportunity for passing plan benefits to heirs (as no MRD is required, allowing for continued tax-deferred growth of the funds) and can also be advantageous to those whose post-retirement tax bracket remains high. Refer to Publication 590-A for detailed information about contribution limits, rollover opportunities, and other pertinent rules.

If you are interested in a more detailed explanation of the power of tax-deferred growth, email me at [email protected].

Law Practice Succession Strategies

An asset that has been overlooked for years by most lawyers is the potential value of their interest in the law practice. As attorneys build their practices (no matter the size of the law firm setting), they normally enjoy a healthier income stream over time. However, in many practice areas, the attorney also has the opportunity to build an equity interest that can be “cashed in” upon retirement.

When a solo sells his or her practice, it is normally to someone the retiring principal attorney already knows—often a junior attorney who has been groomed along the way or else someone in the community. From time to time, a business broker is able to connect the seller and the buyer. Those working in a larger firm setting need to review partnership agreements in order to ascertain financial rights upon retirement.

The best time to begin working on your succession plan is the day you start practicing law. The second-best time is now. Structuring and running a law practice as an efficient business from the inception will not only enhance its long-term marketplace value but will also contribute to a significant increase in profits along the way.

Keep in mind that your practice will be attractive to a potential successor only if it has established a sustainable brand, a proven method by which to attract clients, and runs like a well-oiled machine. A practice with established infrastructure and systems could be an attractive prospect for an attorney seeking to start a practice or for a larger firm seeking to build a department in your practice area. Consider which of the following management suggestions make sense to you.

  • No matter the size of the practice with which you are affiliated, the most effective way (in most scenarios) to enhance your economic worth is to develop a system that reliably generates profitable client relationships. Instead of the random approach taken by most, set yourself apart by creating and implementing a business development plan.
  • Become familiar with the impact of key performance indicators (KPIs) on your bottom line. For example, develop a method by which to gauge the success of business development initiatives. How many leads were generated? How many made appointments for consultations? How many retained you? How much revenue was generated?
  • Develop golden habits of regular billing as well as reviewing your financial performance on a monthly basis.
  • Create a client-centric brand by delivering top-notch legal service to each and every client.
  • Develop systems and checklists that allow you to leverage yourself by delegating effectively to junior attorneys and staff.
  • Effective succession planning requires the willingness to share your wisdom, skillsets, and connections with a junior attorney. Not all senior lawyers are willing to trust another, especially when it comes to handing off clients and contacts. That self-protective attitude has its limits.

The Next Phase

Leaving the full-time practice of law involves adjustments on many levels because of the multitude of roles an attorney plays in a given day. Be sure to consider strongly your vision of retirement while taking care of the financial aspect. What do you need to do now to prepare yourself for the next stage of life? What do you need to do to create a sense of purpose for yourself? My approach was to leave the practice at the relatively young age of 55 and to pursue a second career that is flexible and fulfills my needs. Others retire fully at some point and pursue or resurrect hobbies and find great joy in spending more time with family or traveling. What does your future hold for you?

So Take Charge

No matter your current circumstance, you can improve your economic status—over time. A bright financial future is attainable by attorneys willing to form and consistently follow sound financial habits like those outlined above.

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Cynthia Sharp works with motivated lawyers seeking to build sustainable law practices. In recognition of her contributions to the profession, the ABA GPSolo Division named her Trainer of the Year in 2019. During the pandemic, she co-founded legalburnout.com, a community dedicated to the well-being of lawyers.