Early Career
Start with good basic practices.
401k/403b. Establish regular 401k contributions to the maximum extent possible, especially if there is an employer match. Taken out of your paycheck on a pre-tax basis, these funds will be allowed to grow over time to create a pool of money that can be withdrawn in retirement. When deciding on an investment mix, many people choose to consider Lifecycle Funds built around their expected retirement date. These prepackaged investments follow investing principles and proper allocation. During the early years, investors can experience market swings, and if an investment mix is highly concentrated, it may experience more significant swings, which may deter future investments. Working with a qualified professional will help you determine what is right for your risk tolerance and individual needs.
Student Loan Debt. Make timely payments on student loan debt. Doing so will help improve your credit score and decrease this liability over time. Evaluate your effective interest rate to determine whether making extra principal payments to retire this debt early is beneficial in light of your ability to create greater returns on other long-term investments, such as 401k savings. Remember to set up automatic payments from your bank account; some loan providers will give you a lower rate if you do so.
Savings. Begin a program of regular savings. A variety of strategies can be used, including having a portion of your paycheck automatically deposited into a separate savings account or enrolling in a “round up” program with a credit or debit card issued by a financial institution with consumer accounts. Savings goals should be established from a short-term perspective (upcoming vacations, auto purchases, down payment on a home purchase, etc.) and a long-term perspective. Having money deducted from your paycheck or doing automatic savings as the money enters your bank account is critical. The savings plan not only will help you build wealth but also will create a standard of living below your means. Save before you can spend and watch your net worth increase!
Credit Card Debt. Strive to eliminate credit card debt as soon as possible. Thereafter, maintain an achievable strategy of only purchasing on credit what can be paid off very quickly, ideally in the following month. This strategy builds your credit score and reduces expensive interest expenses. When choosing a credit card, consider your spending and personal habits to determine which credit card benefits programs (cash-back, points, miles, or other redeemable benefits) work best for you. Don’t forget to review the benefits annually to ensure you are using the best possible option for your lifestyle. The benefits programs change regularly.
Term, Variable, or Whole Insurance. If you are healthy, term life insurance should be relatively inexpensive and is one way to provide a nest egg for your loved ones if you prematurely pass away. Term insurance is somewhat of a bandaid: you may need it to address a particular problem. Variable and whole life insurance provides the same benefit but at a higher cost because these policies typically carry a cash value that can be withdrawn. Another benefit of some variable life insurance policies is the ability to take loans against that policy’s cash value. Depending on the applicable interest rate, such a loan could be a low-cost way to borrow money to buy an equity interest in a law firm. Whole life insurance is also used more for estate planning since it will be there when you die as long as you pay the premiums. Most people benefit from using a combination of both early in their careers. As assets increase, the term insurance needs may decrease. Your health and age will determine the cost, so review what your employer may offer and compare it with a quote from a qualified insurance broker.
Disability Insurance. Many law firms will offer employer-paid basic short-term and long-term disability insurance. Evaluate your spending habits and savings to determine whether the monthly benefit, plus amounts drawn from your savings, will cover your routine expenses. If not, consider purchasing an additional stand-alone or supplement policy to ensure additional funds are available should a disability arise. A common question that is asked is whether it is genuinely needed. A simple way to answer the question is to ask if you depend on your income to cover your bills. If you do, then you need it. As assets grow and your dependency decreases, lower your benefit and save money on your premium. Your employer may have an option that doesn’t require underwriting, so always consider that option in addition to reviewing plans sold through insurance brokers.
Equity and Law Firm Interest Purchase Planning. If you are in private practice and intend to seek an equity stake, you’ll need a strategy on how you plan to fund the investment. Some law firms will lend attorneys the funds, and others require you to seek the funding from a separate source.
Low-Hanging Fruit. Lastly, don’t ignore the low-hanging fruit. If your employer requires you to charge all travel expenses, CLE costs, and other expenses on your personal credit card and submit an expense report for reimbursement, make sure you are maximizing the benefit of those charges by using the credit card you determine works best for your spending and hobby habits. Similarly, if you travel frequently for business, establish loyalty program accounts and, if you can, retain the “points” to fund your next personal vacation.
Mid Career
Home Ownership. For many attorneys, their personal residence is one of the most significant investments they will make. If you are buying your first home or upgrading from a starter home to a “forever home,” consider how the debt service, appreciation potential, and home value factor into your overall financial situation. A mortgage payment is one consideration for your monthly cash flow. You should also factor in the income tax deductibility of real estate taxes and mortgage interest, miscellaneous costs of home ownership such as utilities, insurance, homeowners association dues and assessments, and repair costs. Many recent studies have shown that renting makes more financial sense than owning if you do not plan to stay in the same residence for more than three years based simply on closing costs and interest rates. Also, remember that buying a home happens first, and paying for a home comes second. Having the right amount to put down on the home can cause financial stress, and many only look at the ongoing mortgage and carrying costs to determine what they can afford. Factor in both situations before you decide on what size of home you want to buy.
Personal Financial Statement. If you haven’t already done so, this is the right time to begin preparing an annual personal financial statement (PFS). Most financial institutions have a template available to customers. A PFS is a great way to track your assets and liabilities in a simple, easy-to-read format. In addition to your assets and liabilities pages, consider adding another that outlines each year’s goals. On this page, outline each goal and an update next to it to track your progress. This 5-minute exercise will increase accountability and may impact your retirement success.
Private Equity. Consider diversification options if you have established a solid base. Friends or families may be starting businesses and ask you to invest. Corporate employers may have stock options. Clients may offer you a profit or carried interest as compensation instead of an hourly rate for a particular project. Work with a qualified professional to determine if this is appropriate for you. For some private equity investments, you must be an “Accredited Investor.” To be one of those, you need to verify a certain level of assets because these investments tend to carry more risk and, thus, a greater risk of loss. They also can have a great deal of upside. That doesn’t mean they are good or bad; just know a few additional steps may be required.
Long-Term Care Insurance. This is also when many consider whether to purchase long-term care insurance or “self-insure” with other assets instead. The long-term care insurance arena has substantially changed over the past five years. Policies that were once affordable and provided robust coverage have been overhauled. Carefully evaluate whether a long-term care policy provides the type of coverage you might need and whether the premium costs are worth it.
Estate Planning. If you haven’t already created an estate plan, mid-career is a great time to do so. By this point, you may have married or entered a domestic partnership, had children, or created other relationships you want to benefit from when you pass. You should include your PFS with these documents as a way for your loved ones to locate your assets. There are a myriad of end-of-life planning, tax, and other considerations that an estate planner can help you evaluate, which are beyond the scope of this article.
End of Career
By this stage, the fruits of your labor should be stable and ready for a slow harvest over a long time. But this is also a period of compression for many attorneys as health demands, caring for aging parents, and assisting children to launch from the nest assert competing demands on time and resources.
College Costs. Ideally, you or a family member, such as a grandparent, created a 529 Plan many years ago that covers the entire cost of higher education for all your children. Practically speaking, however, most attorneys end up paying out-of-pocket for some or all of their children’s higher education costs. Nevertheless, a few strategies can still be implemented. First, complete the FAFSA. Most institutions require this for merit-based scholarships, and all institutions for need-based financial aid. Second, if you can outpace the interest rate with alternative investments during the borrowing period, evaluate whether the prevailing student loan interest makes borrowing some portion of the education costs a viable strategy. Most student loan interest is deferred while the student is a full-time enrolled student. Consequently, there is an opportunity to borrow funds at a lower interest rate than the student’s parent might earn in the stock market or other investments. As with other factors, it is a matter of balance.
Some services assist families during the college decision process and help reduce the overall cost. They help identify the best college choice for the child, locate grants and scholarships, and locate lower-cost loans. This will help reduce the cost of education. Far too often, families fall into the trap of picking a school based on the popularity of its logo. Using these services may also be a great way to have a third party encourage students to study more.
Portfolio Balance. During the last ten to fifteen years of your career, you should look to stabilize your overall portfolio. This is not necessarily the time to take bold moves with risky investments, but rather consider balance with a more significant emphasis on less volatile and more easily accessed items. Portfolios need to adjust just like any other piece in your financial plan. Time horizon is critical, but so is creating a sense of security as you enter the final stretch of your career. Far too often, people have a goal of retirement only to have it extended because of an overly aggressive portfolio. If you have notified your employer of a set retirement date only to ask for more time, your employer may be unable to accommodate you. Many employers plan for your replacement, and therein lies the problem. Working with a qualified professional to consider your specific situation can be helpful. Another factor to consider is how people like to invest in companies they are familiar with instead of the best investment. If you like Coke over Pepsi, you may lean toward Coke as a company to invest in. Have a third party review your holdings and remove personal biases.
Inheritance Planning. In addition to re-evaluating how you want your assets to pass upon your death, you may also consider what you will do with any assets you inherit from your parents or older relatives. Instead of considering these gifts as a windfall, they may become seed money for new business ventures, college tuition costs, the early purchase of retirement homes, or philanthropic endeavors.
