Hitting the mark: Making and meeting financial savings goals at every stage of your legal career
With the end of the year quickly approaching, New Year’s resolutions have begun percolating in the minds of many
With the end of the year quickly approaching, New Year’s resolutions have begun percolating in the minds of many. One of the most popular resolutions, saving money, easily rivals those new workout routines everyone swears they’ll stick to. But what do you do when it’s October and your savings account has little to show for your January promise?
You don’t panic, that’s what–mainly because there’s still time to create and follow through with an end-of-the-year savings plan. Today, we’re going to talk a little bit about some of these fourth quarter savings strategies that are great for attorneys in particular.
Assessing Your Financial Health
Your savings goals will naturally differ depending on where you are in your career. However, there are a few general things to keep in mind when reviewing you or your firm’s financial health. With 75% of attorneys working for a private practice–and half of that number working as solo practitioners–most business decisions will be in their hands. However, anyone who’s gone to law school can tell you that they didn’t come out on the other side armed with the business acumen needed to keep their practice afloat, let alone preserve their own financial health.
So, what are some different savings strategies for attorneys at varying points in their career?
- Novice – The biggest obstacle young attorneys will face is getting over the student loan hump. It’s not uncommon for young attorneys to get their feet wet as public defenders, a role which generally qualifies them for public service loan forgiveness (PSLF), an income-sensitive repayment plan that helps reduce federal student loans for people working in public service.
But let’s say you make a career move that puts you in a higher income bracket. In that case, you most likely won’t qualify for PSLF anymore. What you can do instead is take stock of your finances, including your income, monthly expenses, savings, debt, and investments. You might discover that some of your money is funneling into certain areas more than others, which is the point when you’ll need to restructure your savings plan.
If you don’t have emergency funds in place, start setting aside money for those now. These savings should equal six months’ worth of your living expenses (not income). This number may vary depending on your income stability, though.
Moreover, there’s no better time than right now to start saving for retirement while you’re still young. If you set aside 10% of every paycheck from the beginning of your career and then work for 35 to 40 years, you can actually end up retiring on 80% of your working income, which includes social security.
- Mid-Range – Even if you missed the early savings boat back in your late twenties and early thirties, there’s still time–and hope–to get a good savings plan going. If you’ve got more than a few gray hairs, one of your best bets will be a retirement plan. If you work for a firm, you could go the 401(k) route which sets aside pre-tax dollars for retirement. Not only is it essentially free money, but it’s tax-deferred, so it’ll accumulate nicely over time.
However, some solo practitioners–especially if they’re below a certain income threshold–may prefer a Roth IRA. These retirement plans take post-tax dollars, so you don’t pay any taxes on them after your initial contribution. However, there are a couple of caveats to remember: contribution limits are relatively low for Roth IRAs, and income phaseouts mean that you may not be able to contribute to a Roth IRA at all, and contributions to a traditional IRA may not be tax deductible. Attorneys with high incomes may have no choice but to go with a 401(k) plan, or a SEP IRA (for solo practitioners).
- Late – So you’re nearing the end of your career without a sizable retirement fund in tow. What’s more, you have your children and grandchildren’s financial futures in the back of your mind. Now what? Experienced attorneys can opt for portfolio-based life insurance, which provides ‘Roth-like’ tax treatment when properly structured. Those with portfolio-based life insurance will see decent annual returns thanks to part of your premium going into your cash-value account somewhat similar to tax-free investments. Depending on the design, growth rates can range from standard to pretty aggressive.
If that’s not your cup of tea, then consider annuities strategies. There are a few attractive options here, depending on your circumstances.
First, you may be able to merge a variable annuity with a Roth IRA, meaning you can purchase an annuity within your existing Roth IRA. If you choose one with living benefits, then you’ll have guaranteed lifetime income. Since your withdrawals are coming from the Roth IRA, they’ll be tax-exempt. If the variable annuity has death benefits, then anything in the owner’s account will be passed to the account’s beneficiaries upon their death.
Another option that will protect your family’s future generations is a private family pension. This is similar to the previous option in that a variable annuity with living benefits will essentially create a tax-deferred inheritance for your children and grandchildren. All you have to do is name your child as the beneficiary of the annuity and one of your grandchildren as the annuitant.
However, the annuity payouts will be calculated according to your grandchild’s life expectancy, meaning that the annuity will grow not only throughout you and your child’s lifetime but your grandchild’s as well.
Of course, the best plan of action when considering how to go about a savings plan is to meet with a financial planner. Not only will they have the experience and financial know-how to construct a detailed, personalized savings plan for you, but they’ll be able to successfully field any questions you might have regarding your financial health or current savings strategies.
Mark Candler and Dave Owens of Maia Wealth are go-to wealth advisers for lawyers and law firms in Colorado. Specializing in debt reduction, investment management, retirement efficiency, and legacy planning, Mark Candler and Dave Owens are trusted professionals for attorney-focused wealth management strategies in the Denver metro area.