We’ve all heard the old farming adage “Make hay while the sun shines.” At heart, it’s an admonition to get the job at hand done while the timing is most favorable. If you’re a lawyer who hopes
not to continue in practice until you drop in your tracks, it’s an admonition you should start heeding today.
Lawyers in mid-career, who have hit their stride and could be considered successful by any of the measures we use to judge mid-career, still need to act expeditiously to set the stage for future success. This particularly means working to ensure success—for both yourself and your firm—during your final years of practice and on into an active and enjoyable retirement. Mid-career is your prime time and it’s the best time to make hay of this type. Let’s look at how to do it.
Re-Optimize Your Client Base
Before cutting a hay field, the farmer studies it carefully, looking for certain things. First, the grass to be cut may not be a uniform thickness throughout the field, which means that it’s important to determine the direction in which the grass falls as it’s cut, so it will spread out evenly and dry thoroughly before it’s raked and baled. The farmer also looks for unseen obstacles, such as that big granite boulder that shows clearly once the field is shorn but lurks just out of sight while the grass is high.
Just as the farmer seeks to optimize the yield from a particular field, lawyers in their prime should look at how to optimize the yield they will derive from their client base in the second half of their careers. Start by reviewing your client list and making sure that those clients really fit the profile of the target clients in your business plan. Also review your current client list by industry or sector leaders to determine whether there are clients out there that you are not representing but should be. Then formulate a strategy for bringing their business to your firm.
In addition, you should do a financial analysis of your current client list to make sure your effective hourly rate on each client and matter is high. Look to eliminate poor or nonperforming clients, evaluating them based on your business performance and future development criteria.
And lastly, look out for hidden obstacles—such as industry trends that may negatively affect your top clients or pending rewrites of existing laws that may effectively gut a practice area. Use Google Alerts and other means to bring you early-warning news about your clients, industry sectors and changes in the law, so you can formulate strategies to deal with any obstacles.
This is also the right time to determine whether you’re properly leveraged and, if you’re not, to make the necessary changes with an eye toward the future. As we’ve previously discussed in this column, there are several levers of profitability you can manipulate. For our current purposes, we want to focus on lawyer-to-staff leverage.
The keys to maximizing your talents through the efforts of others are good staff selection followed by effective delegation, combined with a fee-billing structure that increases the profit margins as you push work downward (i.e., the spread between hourly billing rates and hourly cost increases as you move downward in a firm). If you haven’t already done so, now is the time in your career to learn to let go and develop good delegation and follow-up skills. For one thing, this will move you into a position of leadership and task you with building a team that allows you to get more done today. But it will also evolve into a self-sustaining mechanism that allows the firm to continue to satisfy your current clients’ growing needs, as well as position you to absorb the additional new clients that your current, satisfied clients will refer.
This will also allow the members of your team to work toward developing the skills they will need both to move up to more challenging and satisfying work and to effectively supervise those coming up below them. That, in turn, helps ensure that the firm will continue as a strong, well-functioning entity capable of generating profits to sustain the remainder of your legal career, as well as at least a portion of your retirement income. Remember, at this point you are not building a practice; you are building a team that is self-organizing and capable of generating profits for you by using leverage factors, rather than being driven solely by your billable time.
You may not see immediate payback for such activities through your compensation system as they take place, but you will undoubtedly become aware of the cost if you fail to take part in them. Furthermore, by failing to implement leverage factors now, you will be left scrambling to bring in someone to buy out your practice when you wish to retire, thereby jeopardizing your retirement plans. And you will be running into the same demographic issues that will be faced by all the baby boomers who will be retiring at the same time as you and competing for scarce younger lawyers to buy out their practices.
Start Planning for Your Retirement
Planning involves working backward from the lifestyle you want upon retirement, so you can determine how much you should be socking away in the intervening years.
First, consider when you wish to retire and what you want to do when you get there. Make a list of the things you wish to do after you retire, and have your spouse or significant other do the same. This will give you an indication of your lifestyle expectations and the level of income you will need to support them, enabling you to determine the general after-tax income required in your golden years. Add in all the extras—after all, you don’t want to just exist, right?
Determine your life expectancy. For example, if you are 45 today, you can expect a further 32.14 years of life, 37.44 if you are female. Planning for a fair number more, unless you have divine knowledge, is prudent.
Next, select a discount factor, or interest rate that you can expect to receive on your investments. This is vital. Too high and you will underestimate the amount to be set aside. Too low and you will overshoot your target.
While there are many methods to estimate retirement requirements, here is a ballpark method: Let’s assume you wish to receive $50,000 per year from age 65 to age 87, which is a span of 22 years. Choose an investment or discount rate (r). We’ll say r = .05 or 5%. The present value (PV) for that income flow calculated at age 65 is:
PV = 50,000 (1/r) (1–1/(1+r)**t), where t = 22 and r = .05, is $658,000
That means that you need $658,000 at age 65 to receive $50,000 a year at an interest rate of 5 percent for 22 years.
So do you build in other retirement benefits, such as government benefits? It depends—although we wouldn’t count on it, and for this example, it’s excluded.
Now determine how much you must set aside each year from now until your chosen retirement age. In this example, we must calculate how much to put away in each year after taxes to accumulate $658,000. Let’s continue by assuming that you’re currently age 45 and plan to retire at age 65.
Start by calculating the present value of $658,000 in 20 years from now:
PV = $658,000 / [(1+r)**t], where t = 20 and r = .05, is $247,994 today
Now you need to know how much to set aside in each year of the next 20 years to equal $247,994 today. This is similar to the preceding calculation:
Annual contribution = $247,000 / [(1/r) (1–1 (1/(1+r)**t))], where t = 20 years and r = .05, is $19,900
So you must sock away $19,900 in each of the next 20 years at a rate of return of 5 percent to ensure your assumed income level during retirement. It’s no wonder so many of us continue to work after age 65!
Note that in this example, many factors have been ignored, such as inflation, multiple compounding periods and tax treatment. Moreover, the numbers change if you make different assumptions on rates of return, desired income levels and the like. The critical point, however, is that you have to determine how much to put aside and then, of course, how you will do it. We urge you to make your hay posthaste by determining how to budget into your current lifestyle the setting aside of your retirement funds. Make this a priority—now!