As the financial independence movement gains steam in the United States, lawyers are particularly well-positioned to take advantage. As a professional, if you are willing to focus on financial goals early in your career, you can reap the benefits within a few years in the form of more flexible career options and how you spend your time.
If you are not familiar with this movement, “financial independence, retire early” (FIRE) is based on a simple concept: at some point, you will have enough money to be independent of required work. Once you save enough money, you are financially independent of the requirements of trading your time for money in a workplace setting.
To achieve FIRE, you need enough money. How much is enough? The back-of-the-envelope math is to save roughly 25 times more than your annual spending for retirement (the 25x rule). There are two important variables at play with this rule: the amount of money you have saved and your annual spending. The lower your annual spending, the less money you will need to save.
For example, if your desired annual spending is $100,000, you will need to save approximately $2,500,000. However, if you cut your desired annual spending to $40,000, you only need to save $1,000,000. Importantly, your current annual spending and your desired annual spending in retirement are not the same numbers. It is highly likely you will need less money to maintain your current lifestyle in retirement (e.g., expect lower expenses across broad categories such as transportation, clothing, food, etc.).
The 4 Percent Safe Withdrawal Rate
While the numbers above may seem out of reach—particularly if you are drowning in six figures of student loan debt—many people do not fully appreciate the nuances available when seeking financial independence. For example, the 4 percent safe withdrawal rate—as the 25x rule is known—is based on an influential paper written in 1998 by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz, finance professors at Trinity University. Their paper concludes that a portfolio will have a 100 percent success rate of paying out 4 percent of its value over 30 years.
This means that if you retire at age 65, you can be reasonably comfortable with a portfolio that delivers 4 percent to you annually until age 95. If you think you will need $80,000 per year in retirement income, you would need a portfolio of $2,000,000 by the time you turn 65. Because the professors’ paper only focused on a portfolio’s performance, it did not consider other assets at your disposal, specifically you and your law degree.
Imagine a 25-year-old lawyer with $200,000 in debt and no assets. How does she get to $2,000,000 in assets by the age of 65? Imagine she saves $500,000 over 10 years and quits a highly stressful job at age 35. After paying off her debt, she has $300,000 left. This nest egg could grow from $300,000 to $2,000,000 over the 30 years between ages 35 and 65, assuming an annual return of 6.55 percent on her investments. While the nest egg grows, she is free to pursue whatever path she wants from age 35 onward, as long as she makes enough money to cover her living expenses.
While this hypothetical lawyer would not have achieved FIRE by age 35 in the conventional sense (i.e., she will still need to do something for income), she will have more flexibility in career options. She could pursue a range of interesting, lower-paying jobs that would otherwise not be practical, given the need for a certain level of income.
Lawyers on FIRE
Much writing in the financial independence movement focuses on reaching true FIRE (i.e., retiring early and never working again). However, as a lawyer, if you are willing to put in the work on the front end of your career, you are well-positioned to achieve some version of financial independence, such as “semi-retirement” or “downshifting,” like our hypothetical lawyer achieved. The key to success is to take control of your finances from the beginning of your career when the demand for your incoming dollars is the most stressful, and your financial knowledge is the weakest.